Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If Vale had offered a stake in its Brazilian iron ore mines five years ago, the world would have beaten a path to its door. These days, finding a buyer will be a good deal harder.

It's not that the assets are no good. Vale's massive Carajas complex on the edge of the Amazon rainforest is the world's biggest iron ore mine , and produces the highest-quality rock. The product is so good that it pretty much makes up for Vale's distance from its main export markets in Asia, which adds about $14.10 of freight costs to every ton of iron ore, compared with $3.50 for an Australian competitor like Fortescue.

Metal Fatigue
Iron ore prices have been falling for five years
Source: Metal Bulletin
Note: Shows price for 62% iron fines CFR Qinqdao.

No, the problem is the dearth of companies hungry for acquisitions in iron ore.

If you're in the mining business you ideally want to produce commodities for which global demand exceeds available supply. That's not the case with rust-red rock.

Digging Deep
The world's big four iron ore miners have doubled output over the past decade
Source: Bloomberg Intelligence, company reports
Note: BHP Billiton and Fortescue have June year-ends. Forecasts for 2016 show Vale and Rio Tinto predictions for the calendar year, BHP and Fortescue predictions for the 12 months through June.

The top four miners have more than doubled production over the past decade, and aren't slowing down much -- even in the face of a Chinese steel industry that needs to shrink by about 20 percent, according to the country's second-biggest steelmaker. Vale isn't helping on that front: its S11D complex, due to start later this year just south of Carajas, will add an extra 90 million metric tons a year to global supply.

With no major iron-ore producer predicting shortages any time soon , the best candidates to buy a mine stake at present are strategic buyers such as consumers or traders. That's been a common model in the past: Mitsui & Co., Nippon Steel, and Sumitomo Metal Industries own almost half of Rio Tinto's Robe River venture, while Hunan Valin, a Chinese mill, bailed Fortescue out of a tight spot in 2009 by signing up to a share placement.

Vale's holding talks with mining companies in Asia about the stake, people familiar with the matter told Bloomberg News, but many of the potential players have retired injured from the field.

Japan's biggest trading houses, previously major buyers at times of weakness, see little prospect of a recovery in commodities. China's major steel and mining companies may perhaps have access to the government's magic financing machine, but seen as normal businesses, most should be far too busy licking their wounds to be considering acquisitions.

Sweet Spot
Most Asian miners and steelmakers with the capacity to provide Vale with cash have their own debt problems
Source: Bloomberg
Note: Shows select companies with market capitalization of at least $5 billion. As a rule of thumb, interest cover below 2x and net debt/Ebitda above 4x makes M&A very hard to finance.

China Shenhua Energy, the world's biggest coal miner by revenue, would be an interesting possibility. It's one of the few with a balance sheet to contemplate a deal like this; its expertise in digging up and transporting bulk commodities would be a decent fit with Vale; and a stake in iron ore would help balance risks from a decline in Chinese thermal-coal consumption.

Steelmakers may also have a look: Japan's NSSMC and JFE and South Korea's Posco have the capacity to make a deal, as does China's Baosteel, despite its bearish view of demand. And there's always the possibility that an acquisitive group like HNA or a sovereign wealth fund could decide that now is a good time to buy iron ore. 

Still, whichever way you look at it, Vale has picked a bad time to put out its For Sale sign. Five years ago, there was a seller's market for iron ore assets. Now buyers have the upper hand.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It depends on where you draw the line between a mine and a mining complex. Rio Tinto's Hamersley Iron business produced 189 million tons of iron ore in 2015 but is spread across nine pits, many of which are hundreds of kilometers from each other. Carajas produced 130 million tons of ore in the same year from four nearby pits.

  2. Some analysts are more bullish. Bloomberg Intelligence's Kenneth Hoffman argued in 2014 that a deficit could emerge as soon as 2018 using an "aggressive" assumption that seaborne iron ore demand will rise 5 percent a year. Under a more bearish assumption that demand falls by 2 percent a year, the world "will be awash in iron ore for the foreseeable future," he wrote.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net