Vale (NYSE:VALE) has announced the completion of the sale of its 44.25% stake in Fosbrasil, a Brazil-based producer of purified phosphoric acid, to Israel Chemicals Limited, after fulfilling all conditions for the completion of the transaction, including regulatory approval for the same. [] The company had announced the sale of its stake in Fosbrasil, subject to regulatory approval, for $45 million in December 2013. [] The transaction is a part of Vale’s efforts to shed its non-core assets as it grapples with an environment of subdued iron ore prices. The sale of iron ore, including iron ore pellets, accounted for 73% of Vale’s revenues in 2013. []
Iron Ore Prices
Iron ore is the chief raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. International iron ore prices are largely determined by Chinese demand, since China is the largest consumer of both steel and iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. [] However, weak demand for steel in China has translated into weak demand for iron ore. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. []
On the supply side, expansion in production by majors such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in subdued iron ore prices over the next few years. [] Iron ore prices stood at $74 per dry metric ton (dmt) at the end of November, around 46% lower than at the corresponding point of time last year. []
Sale of Non-core Assets and Disciplined Capital Allocation
Vale’s profitability has been under pressure due to falling iron ore prices. The company’s adjusted Earnings Before Interest and Taxes (EBIT) margin, which excludes the impact of one-time items, fell from around 37% in the first nine months of 2013 to around 27% in the first nine months of 2014. [] In response to the environment of subdued iron ore prices, the company is focusing on developing its core mining assets, selling off non-core assets, and rationalizing capital expenditures. Including the sale of Fosbrasil, the company has sold off nearly $6 billion worth of non-core assets since 2011. [] Most of these sales were concentrated in 2013.
Vale’s efforts at rationalizing capital expenditure are reflected in its recently released capital expenditure budget for 2015. The company announced a capital expenditure budget of $10.2 billion for 2015. [] This is sharply lower compared to Vale’s capital expenditures in 2014, which is expected to total approximately $13.8 billion. [] These measures taken by the company will allow it to operate more competitively in a low iron ore pricing environment. Given that low iron ore prices are expected to persist in the near term, these are steps in the right direction for Vale. []
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