For years, Brazil’s Vale SA fought with rival iron-ore producers in Australia to supply the fast-expanding steel industry in China by building more mines and boosting output. But slowing demand and prospects of a multiyear glut are changing the battle lines. Now, it’s all about protecting ever-narrowing profit margins.
The challenge for Vale is that its mines are more than 8,000 miles (13,000 kilometers) farther from China than Australian competitors Rio Tinto Plc and BHP Billiton Ltd. That means shipments are more expensive at a time when ore prices are half what they were two years ago. After a record $13.5 billion loss last year, the Brazilian company is investing in higher-quality reserves and automation to erase that cost gap.
It won’t be easy. Vale is producing record amounts of iron-ore, which accounts for more than half its revenue. While operations are returning to profit in 2016, earnings will drop next year, according to analysts surveyed by Bloomberg.
After taking on massive debt when commodity prices were booming, Chief Executive Officer Murilo Ferreira is selling assets and betting he can streamline operations enough to cut production costs by 2018 to $10 a metric ton, or about half what they were in 2014.
“This is what’s fundamental — the fight for even one minute of efficiency,” Humberto Freitas, Vale’s executive director of logistics and mineral exploration, said in an interview in Rio de Janeiro. “Because it’s not just that one minute. It’s one minute spread over, for example, six thousand train cars. When you talk about one minute, you are talking about a lot of money.”
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