Vale’s New Technology Could Help Put Lipstick on Pig Iron Ore
Vale (NYSE:VALE) is investing close to $70 million in the development of a demonstration pig iron production facility using a new technology that will reportedly lead to significant cost savings in addition to cutting emissions and reducing the turnaround time for the production of pig iron, a key component of steel. [1] Vale hopes that these new technologies will allow the mining giant to use lower grade ore to product pig iron ore faster and more profitably than before. While Vale is the world’s largest iron ore mining company and it gets 18 percent of its value from its nickel business. It competes internationally with other mining giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).
See our complete analysis for Vale here.
New Technology Improves Pig Iron Production
The rapid rise of China as the world’s largest steel producer has resulted in a substantial increase in the demand and prices of the raw materials used for iron ore and coking coal, the primary ingredients for making steel. These developments, coupled with the high capital cost of setting up conventional blast furnaces, have cut into steel manufacturers’ profitability and cash flows.
This technology was recently developed by Tecnored Desenvolvimento Tecnológico of Brazil, in which Vale owns a 43% stake, and Vale plans to invest further in setting up the first pig iron production plant.
According to the company, the new technology will help reduce steel manufacturing costs by 30 percent by allowing the usage of lower grade iron ore and cheaper energy sources such as bio-gas. It will also help reduce carbon emissions by 5 percent, nitrogen dioxide emissions by 95 percent and particulate matter by close to 85 percent. [1]
The smaller furnaces are able to produce pig iron in 30 minutes, whereas a traditional furnace takes close to 8 hours. Because they are smaller in size, they will be set up in multiples, helping the producers to better control the supply by shutting down individual furnaces when demand is low.
Negligible Business Segment Could Grow Meaningfully
Pig iron makes up a very small percentage of Vale’s Ferrous Minerals business, with a contribution of around $30 million in revenues. This number could rise significantly if these projects are successful. Pig iron could become a significant revenue driver for the company with higher profit margins as well.
This seems like a logical extension for Vale’s business considering that the company produces the basic raw material (iron ore) for producing pig iron. Moreover, with a more efficient technology in hand, the company could also benefit from adoption of the technology by other manufacturers as well.
We have a $34 price estimate for Vale, which is significantly above the current market price.
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Notes:- Vale Says New Pig Iron Technology to Cut Steel Costs, Reuters, Sept 2011 [↩] [↩]