Vale Signs Iron-Ore Agreement With Chinese Shipper Cosco

Vale SA signed an accord with China Ocean Shipping Co. to transport iron-ore with giant vessels known as Valemax as the world’s largest producer seeks to curb costs amid slumping prices of the steel-making ingredient.

Vale will transfer four of its 400,000-metric ton vessels to Cosco, as China’s largest shipper is known, and charter them for 25 years, the Rio de Janeiro-based miner said in a statement today. Cosco will also build 10 vessels of similar size to ship Vale’s iron ore. No financial terms were given.

The Brazilian company started operating Valemax vessels in 2011 in a bid to reduce the transport cost advantage of Australian competitors closer to China. The accord, signed as iron-ore trades near five-year lows, suggests Vale may have overcome difficulties convincing China that anchoring the giant vessels at Chinese ports is safe.

“The deal makes sense to us as the company frees up some cash (in tough iron ore markets) and partners with Chinese players to help minimize any issue with the docking of very large ore carriers in China,” Banco BTG Pactual SA analysts Leonardo Correa and Caio Ribeiro said in a note to clients.

Prices of iron-ore, the key ingredient in the production of steel, are down 39 percent this year on signs of slowing Chinese demand and as Vale, BHP Billiton Ltd. and Rio Tinto Group increase output, betting higher volumes will force less competitive mines to close. Vale, which plans to double shipments to China in the next five years, supplies 12 percent to 14 percent of the country’s iron ore, Jose Carlos Martins, Vale’s head of ferrous and strategy, said Aug. 8.

Ore with 62 percent content at the Chinese port of Qingdao fell 0.3 percent to $82.38 a dry ton today. Shrinking port inventories may see prices recover to as much as $100 by the end of the year, Vale Chief Executive Officer Murilo Ferreira told reporters today in Beijing.

The “framework agreement” was signed by Ferreira and Cosco Chairman Ma Zehua, according to today’s statement.

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