Yesterday Vale do Rio Doce (RIO) outperformed the market due to more positive short-term outlook on metal commodities prices. In fact, the cost of shipping dry bulk commodities like iron ore rose yesterday to its highest level in the last months, up 51% from its December low.

This is a good indicator of the demand for commodities and global economic activity. Even though the overall economic environment remains quite challenging, it seems that demand for metal commodities, particularly in Asia, already reached the bottom.

Brazilian newspapers reported today that negotiations between Baosteel and Rio Tinto (RTP) have been going on in order to define iron ore prices for 2008. The price defined in this negotiation should be followed by other iron ore producers like BHP Billiton (BHP) and RIO.

According to our model, the current price of RIO, around US$14.00, incorporates a price cut for iron ore for 2009 of 25% and a reduction on the the company's production of 20%. RIO already announced a decrease in its production of 10% and we expect further cuts.

There are also some positive long term signs in the Asian market for metal commodities. In the last weeks, Chinese companies, mainly steel producers, have agreed to buy equity stakes in some smaller Australian minning companies, making it possible for smaller minning companies to develop new projects for the medium-term.

We are keeping our Hold recommendation on Vale do Rio Doce, waiting for a more clear definition on iron ore prices for 2008.