Vale Stock Looks Poised to Rise on China Demand

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Global macroeconomics have been punishing commodity prices for four years, taking companies like Vale (NYSE:VALE), the Brazilian iron-ore giant, with them. But Vale says that the outlook for steel demand is looking up, which could give VALE stock a lift.

vale stockCommodities used to be an easy bet, thanks to voracious demand from China. Indeed, name a metal — iron ore, copper, silver, for example — and prices were in a long-term bull market.

But now China’s economy has slowed dramatically, which is affecting prices for commodities across the futures board. Weaker demand from the other “BRIC” nations — Brazil, Russia and India — are also weighing on prices.

As painful as it may be to admit, it looks like the 10-year commodities “supercycle” has come to a close.

That’s a tough environment for a company like Vale. China’s economy isn’t just slowing down. It’s also shifting away from investment and toward consumption. Under those conditions, demand for steel isn’t what it once was, and therefore neither is there as much need for iron ore.

Add in the fact that the industry is awash in overcapacity — a legacy of the supercycle — and it’s easy to see why VALE stock has been underperforming by a wide margin.

Indeed, VALE stock has lost about half its value over the past 52 weeks. Over the last five years, it’s down 68%. And for the year-to-date, VALE stock is off 17% to lag the broader market by about 19 percentage points.

VALE Stock Set for a Rebound?

And yet there appears to be a reason for VALE stock to stabilize and perhaps even rebound in the second half of 2015. The company said the worldwide market for iron ore is going to get tighter because China’s production is down and imports are up.

As Vale CEO Murilo Ferreira said at an industry conference:

“Several Chinese producers — a higher number than people realize — have already left the business. I think we will have a better second half in China than the first half in terms of steel.”

The commodities market has already taken notice. Iron-ore futures have climbed nearly 30% since their all-time low in April. China’s favorable supply-demand equation for steel is more than offsetting production increases in Australia and Brazil.

It’s also helpful to Vale that the industry shuttered so many of its more expensive iron-ore operations. Vale is also shoring up its financial position by selling its fleet of giant ships designed to transport iron ore.

Since China is the world’s largest consumer of iron ore and Vale is the world’s largest producer, it won’t be a surprise for VALE stock to keep building on Wednesday’s big gain, when it jumped 5% on its China commentary. At the same time, a brighter outlook for debt negotiations between Greece and Germany have lifted emerging market stocks.

It’s hard to like VALE stock for anything other than the short term. With revenue and profit forecast to retreat through at least the end of next year, there isn’t a lot of reason for VALE stock to outperform the broader market.

Through the end of the year, however, it looks like VALE stock has a decent chance of being a market-beater.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/vale-stock/.

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