What happened

Shares of Brazilian mining powerhouse Vale SA (NYSE:VALE) rose 11.6% in September, according to data provided by S&P Global Market Intelligence. The company's stock has experienced a series of sharp price advances and declines in 2018, but at the end of nine months, it was up roughly 21% for the year.

So what

Vale's year-to-date gyrations had a lot to do with the price of iron ore, by far the most important commodity to the company; it accounted for roughly 70% of second-quarter revenues and 82% of adjusted EBITDA. The average sales price for iron ore in Q2 was up 4% year over year, but down 12% sequentially from Q1. Demand for iron ore, meanwhile, has been strong, with key market China (which provided 38% of Vale's Q2 revenues) increasing steel production 13% sequentially from Q1.   

A man standing at the mouth of a mine with the sun behind him

Image source: Getty Images

This provides the backdrop for the news that appears to have driven Vale's stock higher last month: two analyst upgrades. Some key industry watchers have taken a positive view of Chinese iron ore demand of late, and upgraded large mining companies like Rio Tinto on the expectation that it will increase. That demand, in turn, should support iron ore prices.

In September, Vale took its turn in the spotlight, receiving upgrades from France's Exane BNP Paribas and Brazil's Bradesco BBI. Chinese demand was once again the driving force. Offsetting that pair of upgrades, however, was a downgrade from RBC Capital. That said, Motley Fool's Rich Smith noted at the time that the downgrade was a bit contradictory since the RBC analyst was still forecasting rising demand from China, something that should be viewed as a net positive for Vale. All in all, investors seem convinced that the positives outweigh the negatives here, and that China's steel needs will provide material support to iron ore prices over the next year or so.

Now what

Vale's fortunes will continue to ebb and flow in tandem with the prices of the commodities it produces, and iron ore is by far the most important of those to the miner. If you are interested in investing Vale, you should first understand the dynamics driving the iron ore market. Today, that means taking a close look at China, and making sure that you agree with the assessments that analysts are making about it today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.