Brazil’s largest miner, Vale S.A. (VALE) earlier decided to build shipping vessels in China for the transportation of iron ore from Brazil to China.
At present, Vale intends to borrow $1.23 billion from Chinese lenders namely, Bank of China and the Export-Import Bank of China (China Eximbank) to finance the construction of these shipping vessels. Borrowing in China will have two benefits. Firstly, it will help as a natural hedge against exchange rate fluctuations and secondly, Vale will have an interest arbitrage advantage as borrowing costs in China are much lower than in Brazil.
Vale is also expected to benefit from the rapid industrialization and urbanization in China, the biggest iron ore importer in the world. China’s steel consumption is expected to increase 6.7% to 579 million tons in 2010. We also believe that once the inventory in the Chinese market exhausts, the demand for iron ore will rebound. China is expected to remain the largest consumer of metals in the years to come and hence the medium-term outlook for metal commodities remains encouraging.
The global steel demand is also expected to climb 10.7% in 2010 and 5.2% in 2011. Further, the recovery in the emerging markets is always greater than in the developed economies of the world, which is encouraging.
However, we are concerned about the instability in the Chinese market with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe. A strong exposure to the international markets also puts Vale at a disadvantage in terms of exchange rate fluctuations. Thus, we reiterate our Neutral recommendation. The stock currently retains its Zacks #3 Rank (short term “Hold” rating).