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Wrapup 1 – Vale’s iron ore capacity to fall 25% in ’09

Posted on: April 28, 2009


Reuters – 1 hour 54 minutes ago

By Tom Miles

BEIJING, April 28 – Vale <VALE5.SA>, the world’s top iron ore miner, will slash production capacity by a quarter this year even as it seeks record sales to top steelmaker China, which is pushing for big price cuts.

A cut this size would be in line with Vale’s lower output in the fourth quarter of last year — when it slashed production to cope with falling demand from steelmakers — and would mean around 75 million tonnes less iron ore, according to Reuters calculations.

The Brazilian mining giant will stop producing low-grade ores and shut down high-cost units, the company’s China president, Michael Zhu, told a conference in Beijing on Tuesday.

“There will be a 25 percent cut in iron ore production capacity in 2009,” Zhu said. The company produced 301 million tonnes in 2008.

The global economic crisis is expected to take a huge bite out of world steel demand this year, so Vale is slimming down while focusing on sales to China, the world’s top buyer.

For a graphic on world steel demand, please click on http://graphics.thomsonreuters.com/apr09/CMD_WRSTL0409.jpg

Vale is one of a triumvirate of iron ore suppliers that set global benchmark iron ore prices in annual negotiations with China’s market leader Baosteel <600019.SS>. Vale says that this year it is not taking part, allowing its two rivals BHP Billiton <BHP.AX> and Rio Tinto <RIO.L> to lead the way.

The miners have agreed to cut iron prices sharply but have not yet set any price, Luo Bingsheng, deputy head of the China Iron and Steel Association , said on Tuesday. [ID:nSHA312863]

Backing up the call for lower prices, Tian Zhiping, vice president of China’s No.2 steelmaker Hebei Iron and Steel Group, said the Chinese market for steel products is suffering, despite government efforts to stimulate the economy. [ID:nBJD000731]

The weak steel sector means that despite Vale’s low costs, making more sales to China won’t be easy, said Jiang Qiu, an analyst at Guotai & Junan Securities.

“Chinese steel mills are purchasing less, waiting for signs of direction on the domestic steel markets and the result of the negotiations,” Jiang said.

Despite the steel sector’s woes, China imported a record 52 million tonnes of iron ore in March, up 46 percent year on year, with total imports hitting 132 million tonnes in the first quarter.

Vale wants to grab an increasing share of this, and has said it wanted to ship 30 million tonnes of China in the first quarter, although Chinese customs data showed total Brazilian shipments to China totalled 22 million tonnes during the quarter.

Brazil’s ore has benefited from a collapse in freight rates <.BADI> but faces stiff competition.

Imports from Australia and India rose 29 and 33 percent respectively in the first quarter, while Brazil’s share dropped 8 percent. Supplies from smaller exporters, such as South Africa and Russia, were running at two or three times the 2008 rate.

Vale’s Zhu said the firm would sell at least as much iron ore to China in April as in March, without giving any figures. Vale is scheduled to report first quarter results on May 6.

Vale has sweetened its sales with a 20 percent discount, which Zhu said reflected “actual conditions of Chinese steel mills”. He said Vale was not selling to China in the spot market, so last year’s price served as the provisional benchmark until this year’s talks came to an end.

With iron ore piling up at China’s ports and steel demand in the doldrums, speculation has mounted that cracks are appearing in the benchmark system. Zhu said Vale supported the system.

“Our question is: what is the Chinese steelmakers’ choice? If we don’t keep benchmarking, what are the other choices?”

Since 2003, the average spot market price has been $26 per tonne higher than Vale’s benchmark price, he said.

“Vale never asked for a higher price . We always fulfilled our commitment to the contract.”

For a factbox on the iron ore price negotiations, please click on [ID:nPEK374164]

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