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Companhia Vale do Rio Doce's Iron Will (RIO)
The strength of a developing nation can be measured by the strength of its steel.
As a nation of 1.3 billon, China dominates the landscape as the world's largest producer of steel.
As the world's leading producer of steel, China is also the world's leading consumer of iron ore, the major component of steel.
Brazilian-based Companhia Vale do Rio Doce (RIO) is the world's largest producer and exporter of iron ore and iron pellets, followed by Australian-based BHP Billiton (BHP) and U.K.-based Rio Tinto Group (RTP).
Together, CVRD, BHP and Rio Tinto, 'the big three', control 75% of iron ore production in the world. The apparent stranglehold 'the big three' have on iron ore production suggests that a nation's ability to manufacture steel is also tied to its ability to negotiate a fair price for the iron ore it needs.
Iron Ore Negotiations
In May, CVRD was able to negotiate a 19% increase in iron ore prices with ThyssenKrupp AG, Germany's largest steelmaker. Baosteel, the umbrella organization for all Chinese steel firms, was dismayed since they were hoping to secure iron ore imports with only a 10% price hike from 'the big three' after accepting a 71% price increase last year.
After a long hold out, Baosteel was forced to accept the 19% price increase this past June. While China is looking to other developing nations, including India, for iron, ore it still needs the production from 'the big three' for the foreseeable future. Last year China imported roughly 43% of all ore shipments, representing 275 million tons, up 32% from 2004.
CVRD Diversifies
CVRD's reported $2.1 billion in earnings through the 2nd quarter with iron ore representing 73% or $1.5 billion. In a move to diversify its earnings and capitalize on the demand for stainless steel, CVRD announced the completion of its acquisition of Toronto-based nickel producer Inco Ltd (N) earlierthis month. Inco Ltd produces approximately 20% of the world's annual supply of nickel, behind Russia's Norilsk Nickel (NILSY).
Nickel is used in industrial and consumer products, including stainless steel, airplane jet engines, magnets and special alloys. Inco Ltd reported third quarter profits on October 20th, citing increases in nickel prices during the quarter. Earnings increased to $701 million, up from $64 million a year ago as nickel cash prices on the London Metal Exchange surged to $29,178 per ton from $14,567 per ton.
CVRD Indian Relations
CVRD iron ore mines have been subject to invasions from local Indian tribes who are demanding additional social contributions in the form of housing, healthcare and payment for encroachment on tribal lands. CVRD has agreed to commit $4.2 million to the Xikrin tribe for such programs. However, tensions remain as the Xikrin tribe recently invaded and slowed production at a CVRD plant in northern Brazil just last week. While the invasion ended after 3 days, it highlights the importance of CVRD's ability to address the outstanding social issues of local Indians towards maintaining operational efficiency.
Long Term Value
CVRD's board agreed to a 2:1 stock split in May. On June 7th the American Depository Receipt (ADR) on the NYSE split down to $22.28 and has increased 9% through yesterday's close at $24.28. While CVRD does have social issues to address at home, the long term trends abroad for its iron ore appears intact with China's average GDP growth rate of 10% per year and the expected future steel needs of India off in the distance.
As a nation of 1.3 billon, China dominates the landscape as the world's largest producer of steel.
As the world's leading producer of steel, China is also the world's leading consumer of iron ore, the major component of steel.
Brazilian-based Companhia Vale do Rio Doce (RIO) is the world's largest producer and exporter of iron ore and iron pellets, followed by Australian-based BHP Billiton (BHP) and U.K.-based Rio Tinto Group (RTP).
Together, CVRD, BHP and Rio Tinto, 'the big three', control 75% of iron ore production in the world. The apparent stranglehold 'the big three' have on iron ore production suggests that a nation's ability to manufacture steel is also tied to its ability to negotiate a fair price for the iron ore it needs.
In May, CVRD was able to negotiate a 19% increase in iron ore prices with ThyssenKrupp AG, Germany's largest steelmaker. Baosteel, the umbrella organization for all Chinese steel firms, was dismayed since they were hoping to secure iron ore imports with only a 10% price hike from 'the big three' after accepting a 71% price increase last year.
After a long hold out, Baosteel was forced to accept the 19% price increase this past June. While China is looking to other developing nations, including India, for iron, ore it still needs the production from 'the big three' for the foreseeable future. Last year China imported roughly 43% of all ore shipments, representing 275 million tons, up 32% from 2004.
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CVRD Diversifies
CVRD's reported $2.1 billion in earnings through the 2nd quarter with iron ore representing 73% or $1.5 billion. In a move to diversify its earnings and capitalize on the demand for stainless steel, CVRD announced the completion of its acquisition of Toronto-based nickel producer Inco Ltd (N) earlierthis month. Inco Ltd produces approximately 20% of the world's annual supply of nickel, behind Russia's Norilsk Nickel (NILSY).
Nickel is used in industrial and consumer products, including stainless steel, airplane jet engines, magnets and special alloys. Inco Ltd reported third quarter profits on October 20th, citing increases in nickel prices during the quarter. Earnings increased to $701 million, up from $64 million a year ago as nickel cash prices on the London Metal Exchange surged to $29,178 per ton from $14,567 per ton.
CVRD Indian Relations
CVRD iron ore mines have been subject to invasions from local Indian tribes who are demanding additional social contributions in the form of housing, healthcare and payment for encroachment on tribal lands. CVRD has agreed to commit $4.2 million to the Xikrin tribe for such programs. However, tensions remain as the Xikrin tribe recently invaded and slowed production at a CVRD plant in northern Brazil just last week. While the invasion ended after 3 days, it highlights the importance of CVRD's ability to address the outstanding social issues of local Indians towards maintaining operational efficiency.
Long Term Value
CVRD's board agreed to a 2:1 stock split in May. On June 7th the American Depository Receipt (ADR) on the NYSE split down to $22.28 and has increased 9% through yesterday's close at $24.28. While CVRD does have social issues to address at home, the long term trends abroad for its iron ore appears intact with China's average GDP growth rate of 10% per year and the expected future steel needs of India off in the distance.
by
Gregory S. Davis
Gregory is a freelance writer for Investopedia.com. He has a consulting background in the banking, telecommunications and healthcare fields. Gregory is a graduate of the Wharton School of Business. Click here to visit his website.
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