CVRD forecasts tight global iron ore, nickel markets, strong Chinese growth

CVRD forecasts tight global iron ore, nickel markets, strong Chinese growth

Brazilian mega-iron ore miner CVRD Thursday predicted that global iron ore and nickel markets will remain tight, and copper inventories will continue to be critically low.

During a conference call to discuss third-quarter results, CVRD Finance Director Fabio Barbosa said the CEIC Data, which specializes in Asian economic research, forecasts a 13% average annual growth rate for Chinese steel production during 2006-2012. He explained that most of the planned 300 million tonnes in iron ore production is destined for China. Shipments of CVRD iron ore to China increased by 40% this year.

Barbosa told analysts that China’s domestically mined iron ore has lost ground in the nation’s iron ore consumption. For example, he noted that the mining of one ton of iron ore in China is estimated to generate more than 10 tons of waste and tailings. He added that import substitution does not seem to be an option in China.

Meanwhile, Barbosa explained that the Middle East is become the latest boom region with investments in construction and industrial capacity in Saudi Arabia, UAE, Kuwait, Oman, Qatar and Bahrain, growing dramatically. He also predicted that Indian iron ore export growth will lose steam to the requirements of its own expanding domestic steel industry.

Barbosa told analysts that “nickel inventories are minimal and demand is growing strongly.†CVRD also believes that global growth and Chinese investment in stainless steel capacity will continue to drive nickel demand increase. The expansion of the aerospace, energy and battery industries will also strongly drive non-stainless steel demand, according to Barbosa. He added that nickel supply growth will be constrained in the short term by technologic challenges in laterite nickel projects, high capex costs, resources shortages and production disruptions.

Barbosa said CVRD has now acquired 86.57% of Inco’s capital on a fully diluted basis, and that the integration of the two companies is now in progress. The integration of the two companies will result in a total debt of $7.72 billion of which nearly $5.9 billion is CVRD debt and $1.9 billion is Inco debt, according to Barbosa. CVRD is using $2 billion of its own cash holdings and is borrowing the remaining $15.6 billion with a bridge loan with a syndicate of 37 banks from North American, Brazil, Europe, Asia and Australia. CVRD is bowing less than half of the $34 billion originally offered by the syndicate to finance the all-cash Inco acquisition.

CVRD is already working on reducing its debt by selling its $177 million stake in Brazilian steelmaker Usiminas to Nippon Steel and Brazilian firms Votorantim Participacoes SA and Camargo Correa. The sale cuts CVRD’s stake in Usiminas from 22.9% to 5.9%.

CVRD announced the best performance in its history for the third quarter of 2006 including record net earnings of $1.9 billion or 79-cents per share, a 44.6% increase over the third-quarter 2005. For the first nine months of 2006, net earnings totaled $5 billion or $2.04 per share, compared to $3.64 billion or $1.58 per share during the same period of 2005.

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