Vale Wants More from China

As one of the three largest mining companies in the world, Brazil-based Vale S.A. is not content with its adverse situation in the competition with its peers BHP Billiton and Rio Tinto in China.

On December 24, 2009, Vale CEO Roger Agnelli unveiled the new strategy of Vale’s iron ore trade with China. He said that Vale was willing to drop the benchmark price system for China and get ready for the iron ore spot trading. Meanwhile, Agnelli proved that Vale was attempting to build a distribution port in China. “We are still talking with the Chinese government and when to start this project has not been decided.”

Vale CEO Roger Agnelli (left)

Repairing the Defects

Vale’s plan to build a distribution port in China was no longer a secret.

Compared with Rio Tinto and BHP Billiton, Vale has to afford higher shipping fees to China due to the longer distance. For that reason, Vale has always been squeezed by the two Australia-based mining companies. Therefore, Vale wants to build a distribution port in China to establish its iron ore storage and logistics system and to lower the transportation cost of iron ores from Brazil. Presently, Vale has already built the North China Iron Ore Distribution Center in Dalian Port. But this is far from satisfying the demand. It wants an iron ore distribution center covering the whole China.

The insiders from Vale thought the distribution center should play the role of providing the necessary devices for the company’s new ships whose load totaled 400 thousand tons. In one word, the distribution center “is like a virtue mine”.

It was widely said that this distribution center was most likely to be located in Qingdao Port. According to the insider from Qingdao Port, there are three 400-thousand-tonnage iron ore docks  in the Dongjiakou port area, which will be used for the cooperation with Vale.

While trying to build the port, Vale is also planning to be a “cross-border ship owner” with the hope of fixing shipping fees cost. In 2008, Vale signed with Jiangsu Rongsheng Heavy Industry Co., Ltd to build 12 giant iron ore transportation ships. In addition, Vale also owns five 300-thousand-tonnage ships and one 290-thousand-tonnage ship, which all serve for the iron ore transportation from Brazil to Asia.

Hurdle from China

Building port and distribution center must be approved by the Chinese government. However, the opposition voice from the China Iron and Steel Association (CISA) made Vale’s strategy in China full of uncertainty.

It was known that Vale once planned to build the stock dump in the ports of Rizhao, Shandong and Shanghai to lower the shipping cost. However, this plan received strong opposition from the CISA, which was worried about the possibility that Vale might make the sales price of iron ore subject to the cost insurance freight and conduct the spot trading. This was not what the CISA wanted to see, because the great price fluctuation of the spot trading may exert negative influence upon the production arrangement of the steel enterprises. Meanwhile, the experts said that there was no precedent of the foreign investors engaged in the construction of large-sized dry-bulk port. Therefore, Vale might face some difficulties in the process of being approved.

However, Vale’s new strategy has some positive effect upon China. One big problem haunting China’s steel industry is the chaotic order of the iron ore trade. Vale’s iron ore distribution center, if done, will strike a blow at the iron ore dealers’ actions of storing up ores. Meanwhile, Vale’s stronger competitive power in China could bring about a warning to Rio Tinto and BHP Billiton and soften their rigid attitudes in the iron ore price negotiation.

In truth, many people asked the CISA to take Vale as the key to avoid China’s adverse situation in the iron ore price negotiation. At the beginning of December 2009, the leaders of CISA went to Mexico and Brazil to conduct a review of the mining resources, in which they were expected to talk with Vale on the iron ore deals.

Two Strings to the Bow

The amity of Vale doesn’t mean that it must lower the iron ore price for China.

According to Agnelli, Vale has already prepared for using the spot trading pattern and giving up the benchmark price system in the trade with China. “If the customers are interested in spot trading, we just do it. For us, either way is OK!”

Previously, Rio Tinto and BHP Billiton made the similar statement. They could accept either benchmark price system or spot trading.

According to the analysts, the strong demand of China for importing iron ores and the fact that the price of spot trading is much higher than the benchmark price for Korea and Japan. Therefore, the three mining giants could benefit more from the spot trading in China. They don’t care about the shift between benchmark price system and the spot trading. Even Vale which is showing amity to China will not easily give in during the price negotiation for it doesn’t worry that the deadlock in the negotiation with China will affect its sale.

Therefore, the experts advised China to have two strings to the bow like Vale to deal with any kind of situation. When it gets close to the cooperation with Vale, it should not neglect the small- and medium-sized mining companies, as well as the goal of diversifying iron ore resources.