The macroeconomic outlook for 2022 has changed a lot since the beginning of the year. But what to expect in the coming months? This question tends to be so uncertain that even a forecast for the next quarter may not materialize completely. This is what has happened to commodities, especially iron ore, whose prices are on a roller coaster of sudden ups and downs.
With this scenario, what about Vale’s (VALE3) situation? One can make projections according to the current international market prices of ore and the likely path of the commodity until the end of the year, with risks that include lockdowns in China to global inflation.

At the close of this Thursday (8), the commodity futures contracts for January, traded on the Dalian futures market, rose 3.14%. On the day, the value stood at 706 yuan. The Chinese steel industry uses about 120 million tons per month – more than 80% of the volume is imported.

Ore with 62% iron purity was traded on the same day at US$ 99.80 a ton, equivalent to a rise of 3% in relation to the previous day. With this, it reduced the accumulated losses in September to 1.14%. In the year, the drop is 16%.

In July, the commodity had already suffered a lot, accumulating a 12.04% loss in ore futures contracts with 62% iron purity, not to mention a significant drop in June as well. In August, it lost 2.29%.

The Covid-19 wave, which halted production at the beginning of the year, returned with force in China in August, leading to plant shutdowns.

The international press states that the Chinese government has ordered several factories in Sichuan province to close for six days, with the possibility that other provinces, such as Zhejiang and Anhui, will adopt the same measures.

The current Chinese heat wave has also damaged industry: It has lasted more than two months, making it the longest since complete records began to be made in 1961. Several cities recorded the highest temperatures in their history.

According to Ilan Arbetman, Research analyst at Ativa Investimentos, there were two major factors that brought the downward pressure to iron ore: first, the push by China’s government to stem a new rising wave of Covid-19 in the country.

“This undoubtedly caused greater concerns, and given China’s relevance in this market, you can see that it is a factor that has messed a lot with future price expectations,” he says.

Another point observed is the high inflation, especially in the United States, and now there are, on the part of the global monetary authorities, actions to curb growth and to control price escalation.

That is why global growth expectations are stuck – or should get worse, in the analysis of analysts. “China’s difficulty in reaching 5.5% growth in Gross Domestic Product (GDP) this year has caused the vertiginous fall that we have seen in iron ore prices,” he explains. “When we talk about China, it is still difficult, but the forecast is for growth in the range of 4% to 4.5%. Given the complexities of the scenario, [the number] wouldn’t be too bad.”
Iron ore in the second half of 2022: what could happen?
On the outlook for iron ore for the second half of 2022 (2H22), Henrique says there is a lot of uncertainty about what might happen, but he thinks it is very difficult to see a positive half-year for iron ore, as has happened in recent years.

“At the end of last year a similar thing happened,” he says. “Ore also fell a little bit and this year, the semester should have a demand constraint mainly coming from China.”

The analyst explains that currently it is not very well understood how the lockdown policies of the country are, besides the rigidity of the determinations. “This has slowed down a lot the industrial policy in the country, and the Chinese real estate activity is suffering. We have seen defaults by construction companies, developers, and defaults on mortgages,” he points out. China’s real estate sector is one of the main steel demanders, according to Henrique.
How Vale can suffer with the fall of the commodity
With all these elements, the market momentum directly affected companies like Vale (VALE3), whose shares are extremely correlated to the price of iron ore. On Thursday (8), Vale’s shares rose 1.32%, quoted at R$ 64.51. In the accumulated in the month of August, there was a fall of 2.73%. In the year, they fell 9.63% until August 31.

On Friday, iron ore rises 3.14% in Dalian, China, quoted at US$ 101.40 per ton. Vale catches a ride and advances almost 6%.

“These ‘commoditized’ companies are often priced on top of the commodity and not necessarily on top of the business itself,” said Henrique Tavares, CNPI analyst at DVInvest. “So the investor is very much held hostage to the commodity price.”