Last week, Vale (VALE) announced a price adjustment on iron ore between -28.8% and -44.47% with Japanese and Korean clients. However, the negotiations with Chinese clients continue as a seemingly endless soap opera. According to market sources, the Chinese want price cuts between 40% and 45% on iron, while the average cut for Japanese and Korean clients was around 35%.
As we said last week, the Chinese have built enormous inventories during the first quarter 2009 and is using them to pressure for better prices. However, last Friday it was announced that Chinese steel production has increased 7% in May from the previous month. In fact, steel production in China in May 2009 reached 46.5 million tons, quite close to the record level of 46.9 million tons on June 2008.
The higher inventory makes it difficult for Vale to negotiate a better price, but the increasing production is positive news that can reduce Chinese demands. All considered, we prefer to keep our neutral view on Vale.
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