VALE - Vale: China's Construction Collapse Signals Multi-Decade Peak In Iron Ore Demand

2024-06-21 14:32:06 ET

Summary

• As expected, Vale has declined by ~21% since I last covered it as China's demand falters and production costs rise.
• By 2026, I expect we'll see even lower iron demand from China as its property bubble collapse accelerates despite government stimulus efforts.
• Chinese demand accounts for most of Vale's sales and is the primary driver of iron ore prices, implying a potentially permanent peak in China's iron import demand.
• As the Middle East and Asia governments pursue "make work" construction projects, I think there is evidence that global iron ore demand may never recover to 2010s levels within the foreseeable decades.
• Vale's copper business growth is not strong enough to offset its iron ore risks, potentially leaving the company mildly overvalued.

At the end of 2022, I published a bearish outlook on the mining giant Vale S.A. ( VALE ) in " Vale: Margins Under Pressure As Energy Shortage Increases Costs And Impairs Demand ." At that time, I believed the stock would lose some value due to rising input costs and stagnating demand for metals, particularly from China, resulting in lower profit margins. This outlook has largely proven correct, albeit slower than I expected, as energy prices have declined. VALE has declined by ~21%, seeing its operating margins fall by around 5%...

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