Companhia Vale Ads (NYSE:VALE)

CAPS Rating: 4 out of 5

A leading producer and exporter of iron ore and pellets, Vale has mining operations in 21 countries.

Recs

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Player Avatar dividendgrowth (98.08) Submitted: 3/31/2012 10:32:40 AM : Underperform Start Price: $22.77 VALE Score: -4.84

Another CAPS favorite. Everyone seems to think that China can play this Great Leap Forward in infrastructure building game forever. The last time Chinese played a similar Great Leap Forward game in 1957, it led to an unprecedented disaster that cost 30 million human lives from 1958-1961 (http://en.wikipedia.org/wiki/Great_leap_forward). Let's hope that the current mania just ends with a gigantic commodity bust.

In 2011, China's steel producing capacity reaches 800 million tonnes a year. As a comparison, the first Great Leap Forward had a target of 15 million tonnes, and in order to achieve that, Chairman Mao even ordered personal pots and pans be smashed and melted to make iron and steel. The US peak steel production was 140 million tonnes in 1968, and that was more than enough for all our interstate freeways, the Arsenal of the Democracy, and all of our other infrastructures. The Soviets never went beyond 120 million tonnes. You must seriously ask whether anyone really needs 800 million tonnes of steel a year.

Many Chinese steel mills are already operating at 70% capacity and paying 75% wages. They are struggling. On the demand side, things will only get worse, much worse: real estate developers have piled up 18 months of housing inventories. China's most important infrastructure, the railroad, is virtually bankrupt and has exhausted its borrowing capacities from commercial banks. Bailout is coming, but that takes time. Local governments, who built gigantic infrastructure projects in recent years through land sales and debts, have little sellable land left and are facing their due bills. In the best case, Chinese FAI will slow down dramatically from previous years.

Current iron ore prices are based on assumption that China will grow its FAI at 20% for many years. If that doesn't pan out, iron ore prices will fall through the celler. This is sub 5 stock.

Member Avatar charlieandi (< 20) Submitted: 4/8/2012 1:37:42 AM
Recs: 0

I could not agree with you more. This is 1 * cap stock.

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