Olive Branch from Vale

The Brazilian mining company Vale shows its great ambition to expand in China.

On December 8, the mining company from Brazil Companhia Vale do Rio Doce (Vale) went on public in Hong Kong through depository receipts. It took the lead among the three major mining companies in the world – the other two are Rio Tinto and BHP Billiton in Australia – in going public in China.

The action of Vale shows that this Brazilian company is bullish on the Chinese market. Previously, Vale wanted to build a distribution center in China to lower its shipping cost. However, the steel companies in China feared that it may turn the iron ore sale pattern to the spot sale. Now, Vale went public in Hong Kong and expressed its will to list in the international board of the Shanghai Stock Exchange. This is another measure of Vale after the plan of “building a virtue mine” was denied. Vale says that it is ready to expand its production capacity. In 2011, the iron ore output will be increased to 311 tons to meet the increasing demand of the Asian countries in steel raw materials.

Foresight of Vale

The Chinese companies are the biggest customer of Vale in Asia, who contribute one third of the company’s business. By the third quarter of 2010, Vale realized the revenue of 14.496 billion yuan (USD 2.17 billion), of which the business in China accounted for 35.6%.

In spite of that, the Brazilian company has advantages in China compared with its Australian peers. The long distance between Brazil and China results in the high shipping cost. This is the toughest problem for Vale to expand in China. Transporting one ton of iron ores, the shipping cost from Brazil to China is two times higher than from Australia to China.

According to the data, China imported 100 million tons of iron ores from Brazil in the first ten months of 2010, accounting for 20.4% of the total imports volume. The proportion is 2.2 percentages lower than the year of 2009. The amount of iron ores China imported from Australia increased by 1.5%, taking 43.2% of the total volume.

Vale can not wait to see its failure without doing nothing. Going public in Hong Kong is one of the measures it took. Choosing depository receipts, which doesn’t give it the ability of financing, tells the open mind of Vale. Generally, a company goes public for the goal of financing, or in other words, collecting money for itself. Most of the companies in China’s yuan-denominated A-share market aim at raising capital. But Vale chose depository receipts with no financing ability. That means it only wants expand its brand image and make it more known to the Chinese customers.

Actually, Vale has strong demand for capital for a large amount of investment. There are 18 big projects launched between 2010 and 2022. The planned investment in 2010 is 12.9 billion US dollars and budget in 2011 reaches 24 billion US dollars. Vale plans to increase its output of iron ores to 450 million tons in 2014, which means a 50% increase compared with current 300-million-ton output.

Vale also plans to improve the role of spot sale. In 2010, the proportion of the iron ores sold through spot sale pattern in China is 45% of the total volume. After going public in Hong Kong, Vale will take this opportunity to contact with the Chinese steel companies which invest in China and promote its spot sale pattern. In addition, Vale’s plan of building a distribution i.e. the “virtual mine” in China is not at the back of its executive’s head despite temporary denial.

Just an Illusion

Vale has been listed in China. What about the other two mining giants – Rio Tinto and BHP Billiton? According to the experts, it has very low possibility for the two Australian companies to go public in China. This is resulted from the difference between their strategies and Vale’s.

Actually, Vale is not the only company expanding its production capacity. Rio Tinto and BHP Billiton have the same plan. Rio Tinto plans to improve its output by 30% in the next two years while BHP Billiton’s output of iron ores will increase from 130 million tons to 200 million tons when its West Australian Mine is built.

The two Australian companies, especially BHP Billiton, firmly advocates financialization, which aims at building a financial trade platform for iron ores like the one for crude oil. The platform goes public in the stock exchanges of Australia, London and New York.

Rio Tinto is headquartered in Great Britain. Its annual report says that London is the most important market for its stock issuance. Meanwhile, Rio Tinto and its subsidiary companies are also listed in Europe, New York, Australia and New Zealand.

The former experience has taught the Chinese companies a lesson. Rio Tinto only went public in China if an unprecedented financial crisis broke out. But this is not certain. When the financial crisis swept the world in 2008 and 2009, Rio Tinto didn’t take going public in China as panacea. In June 2009, Rio Tinto would rather pay the penalty of 195 million US dollars than accept the 19.5-billion-USD investment from Chinalco. It seems that this Australian company is trying not to get involved in China apart from the iron ore dealing.

But nothing is impossible. If China’s stock market is attractive enough to get these two Australian companies, making them believe that they can get more profits from going public in China, they will come.

But the charisma of China is not high enough at present. China’s stock market features the high price of fixed assets and houses, which is overdrawing the dividends of the urbanization. The low efficiency of the real economy leads to the bear stock market. The executives of Rio Tinto and BHP Billiton know that simply selling iron ores is more profitable than going public in China – at least it is true now – and they will raise money through iron ore trade instead of financing.

Vale is different from its Australian peers. In spite of its close relationship with the Japanese companies, Vale cannot spread its spot sale pattern to the Chinese steel companies like what its does to its Japanese friends. Its plan of shortening the valid period of the index pricing pattern also encounters boycott from the Chinese companies.

Going public in China may connect the interest of Vale and the Chinese steel companies, which may have the two sides think in the same way. But it is hard to complete the mission with the depository receipts in Hong Kong. Vale once expressed its hope to go public in the international board of the Shanghai Stock Exchange. Apart from the approval of the regulatory department, Vale also has to decide the pattern its listing in Shanghai – IPO or depository receipts. If it chooses IPO, it has to yield the depository pattern to adjust to China’s stock market.

Olive Branch from Vale

Vale once shows its will to get close to China for benefiting from the fast economic development of China.

The traditional distribution center of Vale is established in Europe. Later it extends its arm to Japan. Now it aims at of setting foot in China – the steel consumption center of the world. It takes measures to improve its reputation in China. Going public in Hong Kong is one of them.

Actually, Vale made continuous efforts in recent years. In 2008, Vale ordered 12 cargo ships, each of which can carry 400 thousand tons of iron ores. These ships are specially designed in China. It is said the some of these ships can be used in 2011 and mainly serves for the iron ore reservation project in Qingdao, which was denied by Chinese government in 2009. Despite the failure of the “virtual mine” project, Vale doesn’t give up its plan of developing in China.