Bloomberg News

Vale Says No Reason to Abandon Quarterly Price Contracts

October 20, 2011

(Updates with closing share price in fourth paragraph.)

Oct. 19 (Bloomberg) -- Vale SA, the world’s biggest iron- ore producer, said it sees no reason to change its quarterly contract system after prices for the steelmaking material dropped to the lowest level in more than a year. Shares fell to their lowest in almost two months.

Vale considers the quarterly pricing system “the most appropriate methodology” for the iron-ore market at the moment, the Rio de Janeiro-based company said in an e-mailed statement today. The company said it’s able to adapt to client needs and is willing to work with them on solving issues.

“Vale is always open to discuss and negotiate with its clients solutions that could bring mutual benefits, never aiming to take short term opportunistic benefits, but rather being guided by the concept of a sustainable long term relationship,” the company said in the statement.

Vale’s preferred stock fell 2.9 percent to 37.69 reais in Sao Paulo today, its lowest close since Aug. 22. The stock dropped about 20 percent during 2011, less than the 21 percent decline at Brazil’s benchmark Bovespa Index.

Iron-ore prices for immediate delivery fell about 17 percent in the past month on concern the expansion in China, the biggest consumer of the raw material, may slow on Europe’s debt crisis and tighter monetary policies. Prices on the so-called spot market are below those in quarterly contracts, fueling speculation Chinese steelmakers are seeking discounts.

The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin declined 1.7 percent to $147.70 a metric ton today, its eighth-consecutive drop and lowest level in more than a year, according to The Steel Index Ltd.

‘Willing to Accommodate’

The fundamentals for the metals and mining industry remain “solid in the medium to long run,” Vale said in the statement. “There is no reason for structural changes in the prevailing pricing system.”

Vale is “willing to accommodate” provisional pricing of the steelmaking ingredient on requests from Chinese clients, UBS AG said in a report to clients, citing conversations with the company.

The aim is to remove a lag between quarterly contracts and current spot prices, Rene Kleyweg, an analyst at the bank in London, said in a note to clients dated yesterday. Vale isn’t offering clients an option to switch to spot prices from contract prices, the analyst said, adding that the revision would reflect the quarter’s average spot price, “not that for any given day.”

“Vale is leading this move as, for the time being, it remains the most vulnerable to losing volumes,” Kleyweg said in the report. “Lead times on its deliveries are longer, allowing clients to delay decisions on Australian material for longer than with Vale.”

Market Conditions

Vale may consider changing the pricing on some contracts for the steel-making raw material, Chief Executive Officer Murilo Ferreira told reporters in Brasilia yesterday. The company is currently maintaining its quarterly pricing formula and has “no desire” to sell on the spot market, he said.

“If anyone wants to buy under different conditions, we can discuss it,” Ferreira said. “We adjust according to the market conditions at the moment.”

Vale’s iron-ore contracts are based on a three-month average of price indexes for the period ending a month before the onset of the new quarter. The company, which is scheduled to announce third-quarter earnings on Oct. 26, sold about 42 percent of its iron ore and pellets to Chinese customers during the second quarter, company filings show.

--Editors: Dale Crofts, Robin Saponar

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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