Vale catches a drop because iron ore prices will drop

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China’s iron ore prices have fallen by more than a third in the past three months.

STR / AFP via Getty Images

Iron ore prices are falling and Wall Street expects this trend to continue. It’s not great for iron ore miner sales and cash flow.

Bank of America analyst Jason Fairclough downgraded his rating on iron ore miner


Valley

(symbol: VALE) to be retained from the purchase. He lowered his price target to $ 20 per share from $ 27.

“Profit cuts ahead,” Fairclough wrote in a Tuesday report. He said Chinese growth is disappointing and the Chinese government’s steel policies are forcing capacity cuts at steel plants.

The combination of these two factors will result in a “great [ore] price correction. It has lowered its iron ore price forecast for 2022 to $ 91 per metric tonne and sees a downside to around $ 80 per metric tonne. Ore prices in China are around $ 104 per metric tonne and have fallen by more than a third in the past three months.

Lower ore prices mean lower income. Fairclough sees the 2022 Ebitda, short for earnings before interest, taxes, depreciation and amortization, at around $ 22 billion, down from its previous forecast of $ 43 billion.

It is a bearish outlook. Gavekal Dragonics analyst Rosealea Yao added on Wednesday that ore prices in China are expected to eventually hover between $ 70 and $ 80 per metric tonne.

Still, Vale stock is up 4.5% in morning trading. The


S&P 500

is up about 0.9%. The


Dow Jones Industrial Average

gained about 1.1%.

It’s a strange reaction to a downgrade, but Vale stock has lost around 29% in the past three months. In addition, Chinese iron ore futures prices rose about 5.6% on Wednesday.

However, the one-day boost to ore is not enough to keep Fairclough on its buy rating. Looks like he’s making a call ahead of time. Overall, nearly 70% of analysts covering Vale stocks are still evaluating buying stocks. The average purchase ratio of S&P shares is around 55%. The average target price for analysts is around $ 23 per share.

Valuation is one of the reasons the rest of the street remains bullish. Vale stock trades around 4.6 times estimated earnings in 2022. The S&P trades around 20 times.

This is a low multiple, but stocks of commodity producers always trade at low multiples when commodity prices are high and tend to struggle when commodity prices fall.

American steel stocks such as


Nucor

(NUE) and


United States Steel

(X), for example, are trading at around 8 and 3 times the estimated earnings in 2022, respectively. Steel prices in the United States are close to $ 2,000 per tonne. That is, in layman’s terms, much higher than historical steel prices in the United States. Steel prices averaged around $ 600 per tonne in 2019.

The Chinese ore news is actually not bearish for US steelmakers. Even though ore prices influence steel prices. China is the world’s leading producer and exporter of steel. Reduced steel production can help keep steel prices in the United States longer.

The United States imported about 150,000 tonnes of steel from China in the first half of 2021. This is about a 40% drop from pre-pandemic levels in 2019.

Write to Al Root at [email protected]

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