We believe commodity demand and prices bottomed out in 2Q 09 and expect average metal consumption prices through FY 2010 to be higher than current levels. Global economic recovery is expected to lead to improvement in steel demand from key consuming industries like automotives and construction, supported by the ongoing impact of government stimulus spending and restocking of inventories. On 12 October 2009, the World Steel Association had forecast, global steel demand to increase 9.2% y-o-y to 1,206 MT in 2010. As approximately 98% of global iron ore demand comes from the steel industry, iron ore consumption and prices are set to benefit. Failure of Aluminum Corp of China to gain management control of Rio Tinto Plc and the proposed joint venture between Rio Tinto and BHP Billiton Plc further consolidates the iron ore industry and enhances mining companies’ bargaining power in negotiating annual contracted prices in 2010. Although iron ore companies are expected to face strong pressure from Chinese steel producers during price negotiations, and in China there have been reports that Vale has already signed long term freight price agreements with mills at a 20-30% discount (a development that Vale has denied), demand supply dynamics and the low base effect due to the 33% cut in 2009 point to a likely upward revision in annual contracted prices in 2010. Vale’s leading position and low cost of production will enable the company to greatly benefit from the improving demand fundamentals. The company is also enhancing its transportation capabilities to lessen the shipping costs to Chinese markets, which should improve profitability in the long term. However we expect large scale iron ore capacity build up and slowdown in steel demand growth after saturation of the Chinese steel market to keep iron ore prices depressed beyond 2011. Nevertheless, considering the company’s strong business fundamentals and relatively positive near term outlook for prices we view the stock as fundamentally undervalued at current price levels.

From September 2009, the Research Oracle will begin to accept research submissions from readers – whether amateur or professional analysts – from around the globe. To receive notification of the launch and rules, contributors may register now at
http://www.iirgroup.com/researchoracle/researchoracleaward