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Why Vale Can Still Rise Higher

Summary

Vale shares have pulled back in September as it is being anticipated that a possible supply increase of iron ore will create oversupply and hurt pricing.

However, demand for iron ore has remained robust due to positive developments in China and the trend will continue going forward, which is good news for Vale.

Chinese steel mills have maintained their output this year as infrastructure investments in the country will lead to an increase in demand for steel.

Since China’s iron ore output is slowing down, the country will need to import more iron ore going forward and Vale is ready to capitalize on this opportunity.

Vale’s S11D project will allow it to reduce costs by almost 25%, which will allow it to compete more effectively for Chinese exports.

The rally in iron ore prices has had a positive impact on Vale (NYSE:VALE) so far this year, with the stock gaining close to 70% in 2016. However, of late, Vale shares have pulled back a little as there are concerns that the price of iron ore will take a hit on account of oversupply going forward. In fact, it is anticipated that iron ore will go down from around $55/ton to $50 a ton going forward on the back of new supply coming online.

This has created weakness in iron ore pricing this month, creating a pullback at Vale. However, I think that the demand for iron ore will continue to remain strong going forward on the back of robust demand in countries such as India and China, and Vale will be well-placed to capitalize on the opportunity. Let's see why.

Demand for iron ore will remain robust

A key factor why iron ore prices have rallied in 2016 is because of strong demand from China. The country, which consumes around two-thirds of the global iron ore, has been importing...


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