(Recasts to add details on S&P decision, background throughout)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Jan 23 (Reuters) - Brazil's Vale SA, the world's largest iron ore producer, was downgraded by Standard and Poor's Rating Services on Friday, on expectations that its financial risk profile will deteriorate in the next two years.
New York-based S&P cut Vale's long-term credit rating to BBB+, the third-lowest investment-grade rating, from A-, it said in a statement. But the outlook was raised to "stable" from a previous "negative."
S&P said it expects Vale's finances may weaken "to levels incompatible with our previous rating" during the next couple of years. The downgrade follows S&P's revision of iron ore price forecasts to $65 per tonne for this and next year and to $70 per tonne in 2017.
Vale's business has steadily declined since the end of the last decade, when the company and Brazil were bolstered by robust Chinese demand for commodities. For years, iron ore topped Brazil's list of most valuable exports.
While Vale's business remains "strong," based on its large share of the iron ore seaborne market, high-quality reserves and low output costs, the company is too exposed to the "inherent cycle of the metals commodities industry, its narrow product portfolio and asset concentration in Brazil," S&P said.
Vale, which remains the world's top iron ore miner by a small margin, is selling assets and focusing on iron ore as prices for metals and minerals tumbled last year. Capital spending planned for this year is $10 billion, a shadow of the $24 billion it earmarked for investments at the start of the decade.
Despite the downgrade, Vale remains S&P's highest-rated Brazilian company, according to Thomson Reuters data. S&P had last raised Vale's ratings in November 2011, citing Chief Executive Murilo Ferreira's decision to pursue a more conservative expansion plan.
The cost to protect holders of Vale bonds against default for 10 years, through contracts known as credit default swaps, rose to 325 basis points on Friday from about 322 at the start of the week. Preferred shares of Vale in São Paulo slumped 5.3 percent on the day.
Vale has about $15.5 billion in outstanding foreign currency-denominated bonds and about $7.6 billion in loans, making it Brazil's second-largest corporate borrower after oil producer Petróleo Brasileiro SA, according to Thomson Reuters data. (Reporting by Guillermo Parra-Bernal; Editing by Christian Plumb)