* High-cost producers to drop out if iron prices fall
* Vale sees recovering prices for base metals nickel, copper
* Gov’t attentive to mining industry in regulatory reform
RIO DE JANEIRO, April 25 (Reuters) - Brazil’s Vale SA , the world’s second-largest mining company, said on Thursday it considers the Chinese iron ore market to be robust and that it will be difficult for the price of the main steelmaking ingredient to fall below $110 a tonne.
Demand for iron ore in China, the world’s largest steelmaker and biggest consumer of iron ore, is being bolstered by production of pig iron and direct-reduction iron (DRI), Jose Carlos Martins, Vale’s head of ferrous metals, said on a conference call with investors.
Pig iron and DRI - raw forms of the metal used primarily to balance the iron content in steel and other alloys - contribute about 70 million tonnes of demand to the Chinese iron ore market.
Vale has long said that if iron ore demand falls, high-cost producers will be pushed from the market, reducing supply and preventing further declines in prices. On Aug. 30, though, iron ore fell to 88.30, a three-year low. High cost Chinese steel producers also put an upper limit on prices at about $160 a tonne, he added.
“When prices reach about $160, they must cut production and that affects demand,” Martins said. “When it drops below $110, iron ore supply is cut and prices adjust.”
The conference call was held to discuss Vale’s first-quarter results, which were released late on Wednesday. While profit at Vale fell 18 percent from a year earlier, shares of the company rose more than 3 percent on Thursday after sharp cost cutting limited the impact of lower sales.
Vale preferred shares, the company’s most-traded class of stock, rose 1.7 percent percent to 32.64 reais and its common shares rose 1.8 percent to 34.18 reais in Sao Paulo trading.
Vale is the world’s largest producer of iron ore, the main ingredient in steel. It is the second-largest producer of nickel, which is used to make steel rust resistant.
While Vale sees a limited range to iron ore prices, the limits have not prevented wide price fluctuations. In an effort to reduce volatility, Vale is pushing for more iron ore sales contracts to be based on iron ore futures prices.
In the first quarter of 2012, only 2 percent of iron ore shipments were sold under contracts linked to futures prices on the Platts IODEX index.
Of the rest, 76 percent were based on current spot prices or a spot average for the current month or quarter, and 22 percent were sold based on a past average with a one-month lag.
In the first quarter of this year 34 percent were settled using futures prices and 53 percent using current spot prices.
The volatility in the futures-based price was smallest with a $6.70 difference between the highest and lowest average price per tonne for the last three quarters. The difference for the others was $26.10 for current prices and $22.80 for past prices.
Due in part to the increasing use of the futures market as a benchmark for prices, Vale has not sought to hedge its iron ore price exposure, the company said.
Vale expects the price of nickel, which has fallen nearly 50 percent in two years, to rise this year, said Peter Poppinga, the company’s base metals chief.
This should help the company reap benefits from new production coming on line from its nickel mines on the French island of New Caledonia, the Labrador Coast of Canada’s Province of Newfoundland and in Brazil’s Amazon.
Poppinga also sees the long-term outlook for copper to be good, despite copper prices recently falling to seven-month lows.
Vale expects its Vale New Caledonia mining unit to become cash-flow positive in 2014, Chief Financial Officer Luciano Siani said on the call.
In Indonesia, where the government plans to prohibit the export of nickel ores starting in 2014, Vale is in the process of increasing its capacity to produce metallic nickel to 80,000 tonnes a year from 70,000 tonnes a year and expects to increase that to as much as 120,000 tonnes in the coming years.
Vale said it is in compliance with the new rules and will not suffer any sanctions from the government.
Vale’s Chief Executive Murillo Ferreira said the Brazilian government has been attentive to the mining industry’s concerns in drafting a reformed mining code and is keeping the needs of the industry in mind as it considers higher royalty payments for mineral extraction.
Vale’s coal and fertilizer chief Roger Downey said Vale has not yet dropped the $6 billion Argentine Rio Colorado potash project from its formal investment plan, though it is actively looking for a partner or a buyer.
Argentina recently rejected Vale’s request for tax relief to ease the impact of inflation and a strong Argentine currency, and management said they had no plan B to replace the fertilizer expected from the mine project. The company is now looking for alternative mine sites in Brazil and overseas to secure a source of potash for Brazil’s booming agricultural industry.