For Vale, the world’s largest producer of iron ore, its location in Brazil has always been both its greatest strength and its biggest challenge.
On the one hand, its proximity to high-grade iron ore mines such as Carajás in the north of the country has turned it into a world leader in the industry and Brazil’s most international company.
Between January and October this year, iron ore ranked as Brazil’s second-biggest export just behind soyabeans, accounting for about 12 per cent of total shipments in value terms.
However, on the other hand, with its biggest mines more than 10,000 miles away from the key Chinese market, its geographical position has been its Achilles heel in its battle with rivals BHP Billiton and the Rio Tinto Group, located in Australia, much closer to Asia.
While demand from China is slowing, the country still accounts for 49.6 per cent of Vale’s total iron ore sales and Asia as a whole represents 65.4 per cent, according to the company’s third-quarter results.
As such, finding ways to reduce the logistics costs of these vast delivery routes has always been one of Vale’s top priorities. As the global commodity supercycle ends, pushing down iron ore prices worldwide, these cuts have become even more important.
So far this year, iron ore prices have fallen by more than 40 per cent to a five-year low as new supply from Australia and Brazil has hit the market just as demand from Chinese steelmakers has slowed.
Pedro Galdi, an analyst at SLW Corretora in São Paulo, says: “The three large miners – Vale, Rio Tinto and BHP Billiton – sharply increased capacity, putting more iron ore in the market, and causing prices to fall. Many miners can’t cope with prices at this level – miners in China are halting operations and in Australia and Brazil too.”
Given the vast scale of its operations, Vale is still able to make a profit with iron ore prices at the current $70 a tonne. However, the company is under even greater pressure to reduce costs to protect its margins, he says.
Under Vale’s brash former boss, Roger Agnelli, the company came up with its most ambitious solution to the problem yet. At the height of the commodity boom in 2011, the company decided that the best way to tackle its high logistics costs was to build its own fleet of very large ore carriers (VLOCs) known as Valemax vessels.
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