Vale Trims Investment Budget Reflecting Volatile Commodities Market

on Dec 4, 2012
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**Vale Slashes Investment Plans to Lowest Level Since 2010**

Brazil’s Vale SA (NYSE:VALE), the world’s second-largest mining company by volume, has cut estimated 2013 capital spending to its lowest level in two years with the lengthy global economic slowdown and diminishing demand forcing the miner to rethink its future expansion plans. The move also reflects the growing concern in the industry for the volatile commodities market environment and follows a similar decision by peer Rio Tinto (LON:RIO) reported by iNVEZZ last week, which has also revised downwards spending plans for next year.

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Vale announced on Monday that its board of directors has approved an investment budget of $16.3 billion (£10.1 billion) for 2013, involving capital expenditure of $10.1 billion (£6.3 billion) for new project execution and $5.1 billion (£3.2 billion) dedicated to sustaining existing operations, as well as $1.1 billion (£683,485) for research and development. This compares to overall expenditure of $17.5 billion (£10.9 billion) for this year and $18 billion (£11.2 billion) for 2011, which, according to Vale, was “the peak expected for the foreseeable future.” The Brazilian company’s 2013 investment plan is also the smallest since 2010.

“The prospects of a moderate expansion of the global demand for minerals and metals over the medium-term do require a stricter discipline in capital allocation and a stronger focus on maximising efficiency and minimising costs,” Vale said in a statement, adding that the company’s priority “has shifted from the marginal volume to the capital efficient volume.”

**Iron Ore Prices Fall, but Vale’s Focus on Mineral Increases**
Vale’s retrenchment comes after sluggish economic growth in the United States and Europe, as well as in the world’s biggest commodities consumer China, diminished demand for metals and weighed on the price of iron ore, which accounts for about 90 per cent of the Brazilian miner’s profit. The price of iron ore, a key ingredient in steel, slumped to a three-year low in September, and is currently trading at around $115 a tonne. For the coming year, Vale forecasts a price range of $110-$140 a tonne. The company, which is also the world’s largest producer and exporter of the mineral, said its iron ore output would fall to 306 million tonnes in 2013 from an estimated 312 million tonnes this year.

!m[Brazilian Miner Cuts Spending Plans as Global Slowdown Takes Its Toll and Iron Ore Prices Fall ](/uploads/story/952/thumbs/pic1_inline.png)Despite the recent volatility in the price of iron ore and the general expectation of lower output, Vale plans to focus on the mineral, dedicating 47 per cent of its 2013 capital spending to it. As Reuters reported on 3 December 2012, the Brazilian miner expects a huge derivatives market in iron ore to eventually take shape as traders seek hedging instruments to minimise risk from increasingly volatile prices. Jose Carlos Martins, who runs the iron ore business for Vale said at a news conference in New York: “I believe a big financialisation of the iron ore market will be inevitable.”
**“Investing Only in World-Class Assets”**
Along with its planned spending cuts, Vale announced the removal of its Simandou iron ore mine in Guinea, and the Samarco IV pellet plant with Australia’s BHP Billiton (ASX:BHP) in Brazil from its list of active projects. According to Reuters, citing Vale’s chief financial officer Lucianao Siani, in an effort to dispose of its non-core assets, the company is also considering selling its 22 per cent stake in Norwegian aluminium group Norsk Hydro (PINK:NHYDY).
Vale’s chief executive Murilo Ferreira said: “We are now more than ever strongly committed to investing only in world-class assets, with long life, low cost, expandability and high quality output, capable of creating value through the cycles.”

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