October 27, 2011 / 2:24 PM / 8 years ago

UPDATE 3-Vale keeping iron output strong despite price drop

* Has no plans to cut output, keeps targets for 2011, 2012
    * China credit situation driving drop in iron prices
    * Company says in talks with steelmakers on iron pricing

    By Brian Ellsworth and Brad Haynes
    RIO DE JANEIRO, Oct 27 (Reuters) - Brazilian mining giant
Vale joined its rivals in pledging on Thursday no
let up in iron ore production, even as prices slump, European
buyers cancel cargoes and Chinese steelmakers clamor for price
relief.
    Signaling a firm belief that the nearly 30 percent slump in
spot market prices this month is a temporary blip, executives
of the world's biggest iron ore producer said Chinese monetary
policy easing should help bolster demand from its top
consumer.
    Vale also confirmed further changes in the way iron ore is
traded, saying the company that first broke the age-old annual
contracts system is now in talks with customers to move from
quarterly toward spot pricing.
    "We do not plan to make any cuts to production," said Chief
Executive Murilo Ferreira in a conference call with reporters.
"Vale is one of the companies with the lowest production costs.
If anyone is going to shut production, it will have to be those
with high production costs."
    The comments, a day after Vale's earnings missed analysts
estimates due to a drop in Brazil's currency, show the company
defiant in the face of skepticism about China's iron ore demand
and worries about global economic growth.Company officials said earlier on an earnings conference
call that Vale is sticking to its planned production targets of
310 million tonnes for 2011 and 320 million tonnes for 2012.
Australian rivals BHP Billiton and Rio Tinto 
have also said they plan to keep ramping up output.
    Iron ore spot prices have tumbled almost 30 percent this
month alone, dropping close to $120 per tonne on Thursday after
reaching highs near $190 on slowing Chinese steel demand and
head winds for the global economy.
    Tumbling prices will likely lead most Chinese customers to
migrate toward pricing that is closer to the spot market, said
Jose Carlos Martins, executive director for marketing, sales
and strategy, adding that Vale was willing to accommodate
that.
    But he warned they would not be able to migrate back to
quarterly contract prices later if the spot price recovers as
Vale expects it will.
    "It's not a free ride, it's something that both sides have
to think about and look at what is better in the long term,"
Martins said. "We're trying to avoid opportunistic situations."
    PRICE TUMBLES
    Martins said the company has diverted two or three cargoes
to China per month that were previously bound for other
destinations such as Europe. He attributed this to increased
iron ore output rather than changes in market conditions.
    Rio Tinto this week said Vale's increase in shipments to
China was contributing to the price decline.
    The spot price for ore with 62 percent iron content dropped
to $120.20 per tonne on Thursday , continuing a
steep decline that began in early September.
    Analysts say falling steel demand has been driven by the
Chinese central bank's efforts to control inflation by
tightening credit and raising interest rates, choking off
funding for buildings, roads and railways.
    Vale said prices were falling because of a production
increase in Australia and changes in credit policy that
prevented Chinese traders from borrowing against their
inventories, which spurred many to sell off their iron stocks.
    "We have some signals that loosening of the monetary policy
(in China) is coming," said Martins.
    Analysts believe China is unlikely to ease monetary policy
in the short term, meaning steel output growth could fall by
half and put further downward pressure on iron prices.
    Vale on Wednesday said third-quarter profit dropped 18
percent from a year earlier, missing analysts' estimates as a
tumble in Brazil's currency caused losses on derivatives and
boosted its foreign debt load.
    But management highlighted an increase in iron ore
production, which rose 6 percent from the year earlier to 88
million tonnes. The company's shares were up 2.7 percent to
41.83 reais in Sao Paulo following the earnings and a deal that
could ease the long-running euro zone debt crisis.
    The company's total investments for 2011 will likely reach
$18.5 billion to $19 billion, Ferreira said, well below the
originally planned outlays of $24 billion. Vale said in its
earnings release that environmental licensing had been a major
factor in slowing progress of new projects.
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