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Vale: It's All About the Iron Ore

Vale reports fourth-quarter earnings and says Chinese iron ore demand will tax its capacity in 2010.
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RIO DE JANEIRO (TheStreet) -- Vale (VALE) - Get Vale SA Report reported an uptick in profit from a year ago even as its revenue declined, as the huge Brazilian mining concern slashed costs amid continued weak demand for raw materials from North America and Europe.

Like its two Australian rivals,

BHP Billiton

(BHP) - Get BHP Group Ltd. Report


Rio Tinto

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, both of which

reported financial results

over the last two days, Vale has been saved by China, the world's largest steel producer, which

consumed iron ore and other base metals at a historic pace last year


In nearly all other regions of the world, sales declined sharply for Vale compared with a year ago: North America fell by 49%, Japan by 35%, Europe by 29%. South America as a whole was flat with 2008 (though the company's home market in Brazil grew by a modest 6% in the fourth quarter).

So what about sales to China, you ask? Up 108% year-over-year. Vale shipped nearly $2 billion worth of base metals to China in the fourth quarter and $9 billion in all of 2009, good for 37.6% of Vale's total top line, up from 17.4% in 2008. China now constitutes more than double the business Vale does with Europe and North America combined.

Vale doesn't expect the trend to abate anytime soon, predicting that China and emerging markets generally will continued to lead the global economic recovery in 2010.

The company appears slightly more bullish than its Australian peers. It expects Chinese demand to remain high. That, combined with recovery in other markets, has already driven up spot prices for iron and, the company said, will continue to do so. In its press statement announcing earnings, Vale said it "faces a tight situation" this year, since even by running its iron ore mines and pellet plants at full capacity, "we will struggle to satisfy client demand."

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Overall in the fourth period, Vale said its operating revenue declined 12% to $6.54 billion. The comparisons suffered because prices for base metals -- for all they've rallied since the pit of the recession and bear market early in 2009 -- remain below year-earlier levels.

Vale, which is the world's largest extractor of iron ore, missed analysts' bottom-line expectations, if slightly, posting a profit of $1.52 billion. According to


, analysts were looking for $1.57 billion. A year ago, the company earned $1.37 billion.

Vale attributed the increased profits in the face of falling revenue to aggressive cost cuts and other moves to enhance efficiency. Indeed, in the quarterly press release, Vale congratulated itself for using the "extraordinary opportunities" presented by the recession "to embrace change and structural transformation." The press release even had a title: "Overcoming Challenges."

Corporate-speak aside, Vale and its Aussie iron ore rivals must face up to some real-world challenges as they start up their

annual haggling with China over the year's benchmark iron ore price contracts

. As China's steel industry has come to dominate the world, negotiations with the People's Republic

have grown increasingly contentious


-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.