Investors in Brazilian Miner Vale received a masterclass in what happens to the share price when a stock is overexposed to one commodity and one customer.
The knock-on effect of China’s crippled property sector on the demand for iron ore, which accounts for roughly 80% of Vale’s revenue, resulted in Vale shares tumbling to their lowest level since 2020.
With more than 100 billion reais ($17 billion) wiped off the market value of Vale in 2024 and the prosect of China weak economy continuing to materially impact demand for iron ore, investors have reduced their allocations in the Brazilian company in the past year.
The single biggest issue facing Vale is the sorry state of China’s real estate and construction, which drives the demand for iron ore. The company shipped 185.5 million metric tons of iron ore to the Middle Kingdom in 2023, around 60% of Vale’s annual output.
However, investor wariness for over Vale is by no means sudden with the miner having witnessed a souring of investor sentiment since the messy succession battle that resulted in finance head Gustavo Pimenta landing the chief executive officer role.
Then there was the overhang left from settlement for a deadly mining disaster in 2015, resulting in a renegotiated deal with the government for rail access to its key mines last year.
Meanwhile, lower demand for the steelmaking ingredient, which fell more than 25% last year - ending December at around $100 a tonne - have impacted Vale’s dividend. While share buybacks are expected to halve to $2.1 billion this year, operating cash flow may also shrink to its lowest point in almost 10 years.
Investors may have taken some solace from a minor recovery in the iron ore price in January following expectations of more stimulus from Beijing. However, with China pivoting to greener, high-technology growth and consumption, steel’s overall importance to its economy may continue to decline.
“Vale’s cash generation scenario is a little worse than its peers,” Humberto Meireles, a portfolio manager at Brazilian hedge fund Vinland Capital, said, adding that there’s uncertainty “about how effective the Chinese government will be in reactivating domestic demand.”
Not unlike BHP (ASX: BHP) and Rio Tinto (ASX: RIO) , Value under its new CEO is looking to compensate for weakening iron ore demand by pushing harder to boost copper and nickel production in Canada, Brazil and Indonesia.
Vale shares have plunged by 24% in the past 12 months and fell 2.3% since the start of January.
Nevertheless, JPMorgan Chase & Co recently reiterated a positive outlook for Vale, noting the company is generating solid free cash flow and is well positioned for a weaker Brazilian currency.