Iron ore drop is a wake-up call for Vale and Brazil’s exports to China

Exports of iron ore from Brazil to China represent not only one of the primary sources of revenue for the Brazilian economy but also serve as a reference for the business of Vale (VALE3).

These are sales that accumulated a fall of 39% in the first nine months of 2022 compared to the same period last year.

From January to September, Brazil exported US$14.42 billion of the product to the Asian country, below the total of US$23.45 billion in the first nine months of 2021, according to data from the Ministry of Economy, which includes sales to Hong Kong and Macau.

The result mainly reflects the drop in quotations over the past year. In 2021, the metal’s price reached a record high of more than $220 per ton. This year, the price has been below this level.

On Tuesday, October 4, the iron ore was quoted at US$98, the lowest value recorded in 2022, with a drop of 40% since the peak in the year of US$ 159, verified in March.

But the fall also happens in volume. In all, Brazil exported 172.8 million net tons of ore to China this year through September (including Macau and Hong Kong), a 3% drop from the 177.27 million tons exported in the same period last year.

“More than the volume, the price is what made the difference,” says Tatiana Prazeres, director of International Relations and Foreign Trade (Derex) at Fiesp, who worked in China from 2019 to 2021.

Data surveyed by the Fiesp department for Bloomberg Línea show that in the third quarter, the drop in Brazilian exports of iron ore was 45% compared to the same period last year, which illustrates the effect of the devaluation of quotations.

In addition, there was a 55.8% drop in the price of ore exports to China from the peak in August 2021.

“Considering the weight of iron ore [in the trade balance], this brought down our exports to China, which fell for the sixth consecutive month in September. Still, China remains the main destination of our foreign sales,” said the Fiesp director.

Exports to the world’s second-largest economy fell 3% year-to-date, totaling US$70.9 billion from January to September.

The sales of beef (with a high of 48% in the year), soybeans (18%), and oil (6%) helped offset the fall in ore exports. Brazil is the world’s second-largest exporter of iron ore, behind Australia, and China is the main destination for the country’s exports.

In the assessment of Welber Barral, former foreign trade secretary of the federal government, the price of iron ore has returned to a more realistic level after last year’s surge related to the economy’s recovery from the covid-19 crisis.

“September is a month when Brazil exports a lot of iron ore. It has a weather issue, and it’s usually a high export month.

“And this year [the country] also exported a lot. It was 36 million tons. The big question is that the value of iron ore fell compared to last year, and this reflected in exports,” he says.

CHINA’S SLOWDOWN

The fall in iron ore prices is related to the slowdown of the Chinese economy, hampered by the lockdowns adopted to contain the covid-19 and also by the shrinkage of the real estate market, which reduces the demand for iron ore by Chinese steel mills.

Swiss bank UBS projects growth for China of just 2.6% in 2022 and 4.7% next year, well below the historical average of the past 30 years.

The slowdown in China and the fall of iron ore have affected shares of mining companies like Vale (VALE3), which accumulated a fall of 29% since its peak in March to the closing value of Monday (3). In the year, the reduction is 5.13%.

In a report released to clients, analysts at Santander (SANB11) assess that the Chinese economic activity should continue to be a key concern for investors.

However, measures by the Beijing government to stimulate the economy and issues related to the supply of iron ore in producing countries may keep the metal price balanced.

“Iron ore shipments are down 4% year-to-date on a volume basis.

“On our projections, we consider [the price of] US$100/t at year-end 2023″, said Rafael Barcellos, responsible for covering the mining, steel and pulp and paper sectors for Latin America at Santander.

A sign of difficult times for one of the leading products exported by the country.

With information from Bloomberg