Goldman Sachs Makes a Favourable Case
Iron ore prices have crashed of late thanks to the trade war between the United States and China. In fact, the iron ore price crashed a whopping 22% in just one week in August after it emerged that China won’t be taking steps to stimulate its economy and will adopt a more cautious approach.
That was not surprising as China is the world’s largest producer of steel, accounting for more than half of the global production last year. Now, iron ore is a key ingredient that’s used in the production of steel, and a slowdown in the Chinese market means that demand for the commodity will take a hit.
This is evident from the fact that seaborne iron ore imports into China have been declining. As reported by Reuters:
“Seaborne iron ore imports were 86.1 million tonnes in September, down from 88.4 million in August, but at 2.87 million tonnes per day, September’s daily imports were above August’s 2.85 million.”
So, on an absolute basis, iron ore imports into China fell last month. But Goldman Sachs believes that the commodity can make a strong comeback as limited end-market supply will push prices higher. The investment bank points out that iron ore price could rise to $115 a ton by November, indicating an upside of around 25% from current levels.
If that’s the case, investors can expect Vale stock to receive a nice shot in the arm.
Vale Is Making Progress on the Infrastructure Front
Vale has been taking steps to boost its credibility since the January disaster. The company recently announced that it has received “82 positive structural stability certificates at its domestic operations, with three dams being awarded positive certificates after negative evaluations in March.”
There are still six deactivated dams that are on negative structural stability certificates. Vale needs to quickly get these dams back on track as the company’s output is taking a hit. The company recently lowered its pellet production forecast for the year to 43 million tons as compared to the earlier forecast of 45 million tons.
Though Vale maintains that the lower output won’t impact its sales, the company needs to boost its output or it might risk losing market share to rivals.
Play a Waiting Game
Though Vale has been showing signs of progress, it would be in the best interests of investors to actually wait for the turnaround to materialize. The company is still on a slippery slope as far as infrastructure is concerned, and it is on track to pay out billions in the aftermath of the disaster in the coming years.
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