Brazil’s largest iron ore miner Vale S.A. (VALE) recently announced plans of resuming its Canadian Sudbury operations with temporary employees. On July 13, about 3,100 employees out of the 5,000 at the company’s Sudbury plant had gone on strike. Another 120 workers at its Port Colborne refinery and 450 at Voisey’s Bay in Newfoundland had also joined the strike.

Vale has decided to stop negotiating with Chinese steelmakers on prices of iron ore. It now plans to offer provisional prices on ore shipments, whenever there is one.

China imported huge volumes of iron ore to build inventories at attractive prices. According to Beijing’s National Bureau of Statistics, China bought 58.1million tons of iron ore, up 32% from a year ago. Due to higher inventories in China, Brazil experienced a 6% drop in iron ore export in July compared to the previous year. The situation can even hurt prices in the near future.

However, there are some positive signs as well. Chinese steel production has surged to an all-time high, which helped iron ore price to go up. This week, prices in China touched a year high of $115 per ton, more than double the year-low mark of $58 per ton. This will certainly help companies like Vale, Rio Tinto (RTP) and BHP Billiton Ltd. (BHP).

Despite short-term uncertainties, we expect Chinese demand to rise rapidly in the medium term due to continued economic growth and urbanization in the country. The Chinese urban population currently sums up to about 500 million, but is expected to double in the next 15 years.

We believe that the difficult  economic environment in the U.S. will have limited effect on worldwide steel demand in the medium term. Thus, we continue to rate the shares as Neutral.

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