Avoid This Dividend Stock

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Company Vale (NYSE: VALE  )
Submitted by dividendgrowth
Member Rating 97.12
Submitted on 4/02/2012
Stock Price at Underperform Recommendation $23.33

Vale Profile

Star Rating (out of 5) ****
Headquarters Rio de Janeiro, Brazil
Industry Industrial Metals & Minerals
Market Cap $117.24 billion

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
Another CAPS favorite. Everyone seems to think that China can play this Great Leap Forward in infrastructure building game forever. The last time Chinese played a similar Great Leap Forward game in 1957, it led to an unprecedented disaster that cost 30 million human lives from 1958-1961 (http://en.wikipedia.org/wiki/Great_leap_forward). Let's hope that the current mania just ends with a gigantic commodity bust.

In 2011, China's steel producing capacity reaches 800 million tonnes a year. As a comparison, the first Great Leap Forward had a target of 15 million tonnes, and in order to achieve that, Chairman Mao even ordered personal pots and pans be smashed and melted to make iron and steel. The US peak steel production was 140 million tonnes in 1968, and that was more than enough for all our interstate freeways, the Arsenal of the Democracy, and all of our other infrastructures. The Soviets never went beyond 120 million tonnes. You must seriously ask whether anyone really needs 800 million tonnes of steel a year.

Many Chinese steel mills are already operating at 70% capacity and paying 75% wages. They are struggling. On the demand side, things will only get worse, much worse: real estate developers have piled up 18 months of housing inventories. China's most important infrastructure, the railroad, is virtually bankrupt and has exhausted its borrowing capacities from commercial banks. Bailout is coming, but that takes time. Local governments, who built gigantic infrastructure projects in recent years through land sales and debts, have little sellable land left and are facing their due bills. In the best case, Chinese [fixed-asset investment] will slow down dramatically from previous years.

Current iron ore prices are based on assumption that China will grow its [fixed-asset investment] at 20% for many years. If that doesn't pan out, iron ore prices will fall through the celler. This is sub 5 stock.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2012, at 1:32 PM, DAG1996MF wrote:

    Thanks for another useless Motley Fool "article" Well, not totally useless... when most of these geniuses say avoid/sell, it confirms that its time to buy. That's been a real winning strategy so far. At first, this drivel wasn't even worth reading beyond the first few sentences, but then I noticed "This is sub 5 stock." Calling VALE a sub $5 stock makes it even more clear that this guy is total idiot and/or lives under a rock... right where he belongs.

  • Report this Comment On April 05, 2012, at 1:42 PM, kcsag wrote:

    I am not sure this article meets the standards at MF. The author has not provided an iota of evidence on why an investment in VALE would not be a sound idea, other than, pointing to historical figures of iron ore imports in China, US and the USSR. Two key considerations:

    (1) VALE's exports are not exclusive to China - there is a second country in the equation that is growing at an equally torrid pace and has a burgeoning population to rival China's; and

    VALE's "diversification has been achieved mainly with the acquisition of Inco and to a lesser extent with the acquisition of Caemi and managed to increase the participation of non-ferrous metals on total revenues from 7% in 2000 to around 34% in 2006."

  • Report this Comment On April 05, 2012, at 2:29 PM, DAG1996MF wrote:

    standards? they have standards?

  • Report this Comment On April 05, 2012, at 2:31 PM, jaybird43 wrote:

    Where's the beef. So we throw out all the caps rec, and avoid for what reason? This was a lame piece. I think I''ll put VALE back on my watchlist.

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