The outlook for Brazilian iron miner and steel producer Vale SA (ADR) (NYSE:VALE) hasn’t been terribly optimistic of late, which is to say, they’ve been downright alarming. A few too many pros just don’t see a bright future for steel, or iron ore prices in particular, and that bodes poorly for VALE stock.
There’s a curious detail that seems to be defying these doubters, however, and traders would be wise to note them.
While the rhetoric may be bearish, facts and figures cannot be denied. At the end of the day (or at least at the end of the month), a stock will reflect facts and figures rather than opinions and expectations.
Gloom and Doom for Vale
The headlines of late haven’t necessarily been encouraging. Take, for instance, the recent cuts in Macquarie’s target prices for BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO). The firm doesn’t think commodity prices will make a full recovery until 2018.
Although Macquarie voiced concern, it did not explicitly lower its target price for VALE stock. It could be considered guilty by association.
The technical analysts at institutional brokerage firm CLSA aren’t exactly stoked about the future for commodities either, recently opining that the Thomson Reuters/Jefferies CRB Index could soon slide 15%.
Then there’s Deutsche Bank’s recent prognostication that iron ore will break back below $70 per ton, down from a peak of near $90. Although analyst Paul Young didn’t explicitly say Vale was in trouble, it was more than enough to give VALE stock holders pause. Throw in the fact that Vale will be transitioning to a new CEO over the course of the next couple of months — what’s sure to be a tricky phase — and shares of the iron ore miner become almost unownable.
A funny thing happened on the road to certain doom, however.
The Charts Don’t Lie
While the headlines and prognosticators may be painting a grim picture for iron ore, the market itself is doing anything but. The chart of iron ore prices below (from Business Insider) tells the tale. After jolting itself into a new uptrend in November of last year, the metal continues to march forward, price-wise. It’s even tiptoed to new 52-week highs this week.
Click to Enlarge It’s a far cry from the weakness most observers were expecting, validating the notion that when it comes to the market, “do as a I do and not as I say,” is sage advice.
The majority of the reason steel prices remain in uptrends is demand from China.
The knee-jerk concern is simply that China could rekindle its massive iron and smelting industry, creating a flood of supply and therefore upending the nascent rally.
If that were going to happen, though, it likely would have already. Last year’s steel imports into China reached record levels, and the pace hasn’t slowed down in 2017. Keeping the lid mostly closed on that possibility is a measurably firm regulatory crackdown on low-grade furnaces and highly pollutive sintering plants.
Bottom Line on VALE Stock
To be fair, Macquarie’s and Deutsche Bank’s analysts have valid concerns, and their worries should be heeded. Those analysts are not infallible, though. In fact, Macquarie’s team acknowledged, “iron-ore price upside risk remains significant … and has the potential to drive material earnings upgrades and deliver further capital management surprises over the next six months.”
That sort of hedging leads one to wonder just how convinced they really are of their tepid commodity outlook.
Whatever the case, if your gut is telling you VALE stock is worth a shot despite the headlines, you’re not crazy for thinking that. A lot of other people are betting commodity prices and iron ore prices in particular are going to keep moving higher … and they’re putting their money where their mouth is.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
