VALE Now More China-Dependent

Some days ago, Vale do Rio Doce (VALE) posted weaker-than-expected first quarter 2009 results. The numbers showed a remarkable contrast between the actual results of the company and the great performance the stock has been showing since the beginning of 2009.

The market remains positive on commodity stocks as demand from basic materials in China remains heated. There is a consensus that China will continue to grow in the near future, with annual rates of at least 6% per year, and that the growth would be based on Government investments in infrastructure -- thus they will be quite commodity intensive.

We agree with this positive view on China for the short-term. We also have few doubts that growth in the near future will be very commodity intensive as Government expenses are becoming quite common worldwide, even in developed countries. However, the price outlook for metal commodities could be not as positive as some analysts believe.

Although the huge spending in infrastructure would definitely increase the demand of ferrous minerals, the whole situation is quite unclear. The private sector is still shrinking and a large share of carbon steel capacity is being kept idle in different parts of the world, averaging 50% in the Americas, Europe and Japan.

Excluding China, global steel output declined 36.9% year-over-year -- if we include China, the decline was 28.8%. The extreme concentration of the demand in China is a risk for Vale and the whole mining industry, reducing the industry ability to negotiate prices in the near future.

For 2009, we still expect a 20% to 25% reduction of shippings, coupled with a 30% average price decrease in the very short term for RIO's iron ore. Additionally, the recent appreciation of the Brazilian real against the U.S. dollar -- a trend that we expect to last -- will reduce the company's international competitiveness in the very short-term. All considered, we still prefer to keep a cautious view on Vale, keeping our Hold recommendation for the company's ADRs.

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