China will help to bankroll a major expansion by Brazilian iron ore giant Vale and invest in huge Vale ships that will transport high-quality ore to North Asia – a deal that will reshape the global industry and put more pressure on Fortescue Metals Group.
On a state visit to China with Premier Li Keqiang, Chinese officials agreed to invest in up to eight of Vale’s huge iron ore carriers, known as Valemax ships.
More importantly, China will loan the company up to $US4 billion ($5 billion) to help fund a $US16.5 billion expansion called S11D. The project, which should be finished next year, will produce 90 million tonnes of high-quality iron ore that will be shipped to China at a cost almost as low as that achieved by industry leader Rio Tinto.
While Fortescue’s Andrew Forrest has repeatedly attacked BHP Billiton and Rio for continuing to expand into a weak iron ore market, Brazil’s plans are accelerating.
Vale plans to increase capacity to 450 million tonnes as early as 2018 from 330 million tonnes this year. Its expansion easily eclipses the combined tonnes BHP and Rio will put into the market over the next three to four years.
While the timing of the deal is unexpected, it validates BHP chief executive Andrew Mackenzie’s warning that conducting a parliamentary inquiry into Australia’s iron ore sector would be “a gift to Brazil”.
Mr Forrest has slammed as a “fallacy” Rio and BHP’s rationale that if they don’t expand, other producers will.
COST GAP CLOSING
The deal with China will pave the way for Vale, the world’s third-lowest-cost exporter of iron ore, to narrow – and possibly close – the gap on all-in costs with leader Rio and second-placed BHP.
It is also set to put daylight between the margins of Vale and Fortescue – the highest-cost producer of the four iron ore majors – once the expansion is complete.
Fortescue’s cost-cutting drive since the iron ore price plunged last September has lowered its break-even price – the point where it is not making or losing cash – to near, and at some points below, Vale’s.
Credit Suisse mining analyst Paul McTaggart said China executed the Vale deal “to ensure S11D gets up”.
“It is the Chinese helping them out – as a major consumer of iron ore, China wants to ensure diversity of supply,” he said.
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