Iron's Goldilocks Moment Means Big Profit Without New Supply

(Bloomberg) -- The world's biggest producer of iron ore says the industry is enjoying a Goldilocks moment with prices generating a tidy profit but are not enough to lure much new supply.

“The market is in a sweet spot right now from $60 to $70,” Vale SA Chief Financial Officer Luciano Siani Pires told Bloomberg Television Thursday. “It is a price which does not incentivize too much swing capacity to come back and it's a very profitable range for major mining companies.”

Prices of the steel-making ingredient have see-sawed this year, rallying to almost $95 in February before tumbling to $53 in mid-June as glut fears resurfaced. Now they're back above $70 after an up-tick in demand from Chinese steel mills. But prices probably will average $50 in the final three months as falling steel prices hurt mills' margins, according to Barclays Plc. India's JSW Steel Ltd. said this week that prices may go as low as $40.

Vale disagrees. It's betting prices will stay in a $60 to $70 range for the rest of the year supported by still “very strong” demand and supply “that is a little more tame,” Siani Pires said from Bloomberg's Rio de Janeiro office.

More Normal

For Vale -- even more so than its main rivals in Australia, Rio Tinto Group and BHP Billiton Ltd. -- the differences in price outlook are a big deal. Each $1 drop in iron ore has a $350 million impact on the Brazilian company, the CFO said. That in turn affects its ability to bring down a whopping $22 billion debt load and return cash to shareholders.

While China's demand outlook remains bright, underpinned by infrastructure spending, growth is set to return to “more normalized” levels from the current rate of about 5 percent to 6 percent, he said.

“We're positive about China and we never shared the views that the country would collapse,” Siani Pires said.

Spot ore with 62 percent content delivered to Qingdao was at $72.93 a dry ton on Thursday, after hitting $73.70 earlier this week, the highest since April, according to Metal Bulletin Ltd. The raw material rose 13 percent in July after a 14 percent gain in June, paring this year's drop.

Futures in Asia climbed on Friday, with the most-active SGX AsiaClear contract rising as much as 1.6 percent and that on Dalian Commodity Exchange adding 2.3 percent, signaling further gains in the benchmark spot price.

--With assistance from Peter Millard Emma Chandra and Jasmine Ng

To contact the reporter on this story: R.T. Watson in Rio de Janeiro at rwatson71@bloomberg.net.

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, James Poole