Vale slashes iron ore production, trims nickel too

Saying that it is “adjusting to the new global economic scenario,” Vale (RIO-N) is dramatically scaling back its iron ore mining in order to cope with an estimated 20% production cut by the world’s steelmakers.

Vale notes that as a bulk product, with large-scale operations, “iron ore demands mine-railroad-port-maritime shipping integration and does not allow significant inventory building in expectation of demand recovery, due to physical limitations.”

The company also comments that the slowdown of global industrial production has also negatively impacted the demand for base metals, such as nickel and aluminum, already reflected in declining prices and rising inventories.

Vale is thus chopping its iron ore production by an annual rate of 30 million tonnes. It will shut down of some higher-cost, lower-quality Brazilian mines in its Southern and Southeastern Systems in Minas Gerais state, beginning tomorrow. Idled employees will have “collective vacations.”

Two pellet plants, representing approximately 20% of Vale’s total nominal capacity, will be shut down for maintenance from November 2008 onwards.

Vale’s manganese ore and ferroalloy operations in Brazil will be shut during December 2008 and January 2009, while its Dunkerque ferroalloy plant in France will be kept idled until April 2009. A plant in Norway will have its furnace maintenance extended until June 2009. These moves will cut production at an annual rate of 600,000 tonnes of manganese ore and 90,000 tonnes of ferroalloy.

At its Indonesian nickel operations, acquired with its purchase of Canada’s Inco, Vale will stop using higher-cost thermal power generation and rely soly on hydroelectric power, which will lead to a reduction of nickel-in-matte output by 20%, or about 17,000 tonnes annually. Vale’s nickel refinery in Dalian, China, will keep running at 35% of its nominal capacity.

The good news for Canadians is that Vale’s substantive nickel operations in Canada Sudbury, Voisey’s Bay and Thompson were not singled out for major cutbacks, probably owing to the coampny ability to stockpile nickel production during the current downturn in nickel prices.

In its aluminum business, Vale is shutting an aluminum smelter Rio de Janeiro state. Vale comments that its Brazilian aluminum subsidiary operates at relatively high costs, mainly due to the high prices of electricity. Vale is also constraining its kaolin business to 70% of nominal production capacity.

Still, Vale says that “given the confidence on the long-term fundamentals of the markets for minerals and metals, Vale will implement the capex budget for 2009 as announced on October 16, 2008, that will imply significant job creation in the future. “