With the ‘perfect storm’ for ore, Vale is losing space and analysts point to more opportunities in the steelmaking business

São Paulo – Iron ore has been hit by a complete storm after the surge recorded until May of this year, when the commodity exceeded US$200 per ton.

The fall movement has been felt mainly in the past few weeks. Iron ore prices have corrected from around $180 in early August to less than $100 per ton.

In recent days, sentiment has been further affected by uncertainty over the outcome of the Evergrande situation in China, amid the Asian giant government’s measures to slow down the country’s real estate sector, which also affects the sector’s outlook.

Thus, the actions of Vale (VALE3), CSN (CSNA3), Gerdau (GGBR4) and Usiminas (USIM5) There were demand setbacks of 10% last week, which added to the setbacks of up to 3% for assets the day before. In September, Usiminas shares accumulated losses of about 24%, CSN incurred losses of 20%, Gerdau lost 17%, and Vale incurred losses of about 16%. Outside of the index, CSN Mineração posted a 19% drop in the month.

In Tuesday’s session, the Ibovespa index rebounded, VALE3 shares posted only slight gains, while CSN, Gerdau and Usiminas posted a decline of about 2%.

The scenario that emerges should follow one of the volatility of companies’ stocks in the sector by mainly monitoring Evergrande’s effect on pricesBut analysts are already seeing a significant “asymmetry” between mining and steel companies.

For Bradesco BBI analysts, iron ore prices are likely to remain under pressure in the short term, as demand outlooks are increasingly uncertain. A combination of weaker economic activity data released from China between July and August, reports suggest that demand did not recover as much as usual in September and lack of visibility over steel production cuts in the fourth quarter and early 2022 ahead of the Beijing Winter Olympics. It was already scaring market participants.

Now, with the situation of Evergrande rapidly developing, more uncertainties have clouded the demand outlook, given
Possible side effects on the real estate market and the Chinese financial system (the real estate market is responsible for
about 35% of steel consumption in China).

For now, analysts do not expect a significant drop in steel demand – the Chinese government is likely to intervene, especially given that 2022 is an important year for President Xi Jinping to consolidate power during the party’s 20th National Congress at the end of 2022.

Thus, it maintains the base case of a 1% decline in China’s steel production in 2022, which still indicates the fundamentals of the iron ore market, with prices ranging around $100 to $120 per ton.

In any case, they noted, short-term momentum remains a challenge. Accordingly, the bank’s analysts conducted sensitivity analyzes of the shares exposed to iron ore in our coverage under different iron ore price scenarios.

Taking into account the steepest price decline, with iron ore prices reaching $75 in 2022, they indicated that they see Usiminas and CSN’s valuations as more “uneven” against CSN Mineração and Vale, with the former’s ability to offer more of opportunities.

“CSN and Usiminas, as integrated steel manufacturers, are relatively better equipped to counteract the decline in iron ore prices than other pure iron ore players, while the stock’s recent underperformance means greater inconsistency,” they assess.

Additionally, they maintain the premise that steelmakers’ margins should remain sustainable at healthy and above-average levels globally in 2022, due to: (i) production restrictions in China; (ii) Declining exports from China; and (3) improving steel demand growth worldwide as economies emerge from the pandemic.

Usiminas remains BBI’s first choice as the downside risk appears to have been fully priced in from the analyst’s point of view. “We have maintained our buy recommendation for Usiminas and target price at R$34, as we believe the valuation already implies a very negative scenario in 2022.” The probability of an uptrend in relation to the closing level of the stock the previous day is 148%.

About Vale in particular, João Lorenzi, commodity analyst at Encore Asset, was highlighted in an interview with InfoMoney Radar On Friday (see full interview in the video below) that the recent drop in crude came as a surprise, in large part due to the slowdown in China’s property market, but he remains cautious about the commodity.

He estimates “I am not positive for iron ore, where at some point the commodity is below the price which is equilibrium due to bad momentum.”

For the analyst, for those looking to invest in paper mid-late fall, it might be worth waiting to get in on the action, as crude should drop a bit more and still affect the paper. So there might be a better entry point later.

On the other hand, it highlights that there may be other opportunities, such as in non-ore-related firms, as with Gerdau (GGBR4), which fell sharply amid the decline in shares of steel and mining companies.

It is worth noting that at the end of August, when iron ore was already under severe pressure, Caio Ribeiro, an analyst at Credit Suisse, confirmed in a report that he still saw a lack of willingness to invest in the mining sector. But he made it clear that other names could be more attractive.

At the time, the analyst remained “selectively constructive” in the basic materials sector (which includes mining, steel, pulp and paper), favoring steel companies such as CSN (CSNA3) and Usiminas (USIM5) for the roles of mining companies. see more Click here.

Vale: a controversial issue

UBS BB cut last Friday ADVERSE REACTION RECOMMENDATION (American Depository Receipts or, in fact, shares of companies traded on the New York Stock Exchange) Vale from purchase to sale, and estimates that iron ore surplus of about 150 million tons is growing rapidly in 2022. The bank’s price target for dispute resolution is from $22 to $15.

Analysts note that the surplus is growing, among other factors, as restrictions on China’s steel production affect the demand for iron ore and the continued increase in the global supply of iron ore.

In this scenario, they lowered their iron ore price forecast by 10% for 2021, to $163 per ton, by 12% for 2022, to $89 per ton, and by 6% for 2023, to $80 per ton, given that steel production The Chinese are stable at about 1.07 billion and the supply of iron ore continues to increase.

For Andreas Bokkenheuser and his team, the story of Vale’s earnings becomes less attractive with iron ore under $100 per ton.

On the other hand, Levante Ideias de Investimentos raised some points when wondering if it was time to buy Vale amid the sharp decline.

First, the analysis team notes that the company is at a different stage than it was in the past, with all the heavy and necessary investments largely made. This greatly reduces the investment to be made in the process.

The second point is that with the contracted and projected production increase, the company will be able to produce iron ore at a marginally lower cash cost than the current cost, which is already the lowest in the world in production per ton of ore.

He estimates that “the combination of these two factors, together with higher production/sales volume, will make the company continue to be an excellent source of free cash in a structural way.”

Thus, in the opinion of the company’s analysts, whether to invest in Vale or not will depend on the strategy of each investor. In this year of 2021, the company will pay out direct and indirect dividends, with an average return of nearly 20%, a record amount, and the best dividend yield (earnings in relation to the value of the stock) on the stock exchange.

In the coming years, the company will continue to make money at a solid pace and distribute good dividends to its shareholders. On the other hand, for the capital gains strategy, the scenario may be one of complete pessimism with Vale’s thesis, given the very high sensitivity of its stock price to iron ore prices, with recent declines in line and fully consistent with the melting of iron ore as a result of problems in China,” they assess .

XP, in turn, Highlighting in the report that the price of the commodity should remain volatile, As well as the mining sector’s share price, both here in Brazil and abroad, but Vale remains optimistic. Our team, covering mining and steel, maintains the premise that the commodity should end the year at $120 per ton. In addition, large global mining companies such as BHP (BHPG34), Rio Tinto (Riot 34) and the Brazilian company Vale continues to reduce in relation to the sector and continues to be recommended by analysts”, according to their assessment.

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