Vale Blending Optimism With Caution on Iron’s Biggest Tie-Up

  • ‘We prefer to be more reserved and conservative,’ Alves says
  • No concrete plans yet for start of blending ventures in 2016

Iron giant Vale SA said it’s taking a “reserved and conservative” stance on when its tie-up with Fortescue Metals Group Ltd. to sell blended ore to China will take effect.

“It needs to be transformed first in a binding agreement,” Claudio Alves, global director of iron ore sales and marketing, said in an interview Thursday. Only then can the partners determine “when exactly the blending will start, if it will start.” Asked whether a target had been set for volumes this year, Alves said there are “no numbers. We don’t have any concrete plans yet.” 

Brazil’s Vale, the world’s largest producer, and Australia’s No. 3 shipper signed an accord in March to create joint ventures to blend their differing ores, and giving Vale the option to buy as much as 15 percent of the miner owned by billionaire Andrew Forrest. 

The pact, which would make Vale’s higher-quality ores more marketable and raise the value of Fortescue’s product, has the potential to shake up the global industry by boosting competition with Rio Tinto Group and BHP Billiton Ltd. Fortescue said last month it expects to sees the first blended ore in the second half, according to Chief Executive Officer Nev Power.

Substantive Discussions

“We are very optimistic the merits will be there, will be recognized and we’ll be able to reach an agreement,” Alves said in Singapore after addressing a conference. “They are very optimistic, we are optimistic, but we prefer to be more reserved and conservative in terms of determining when we will start.”

The memorandum of understanding with Vale “provides a number of opportunities for us to work together, with our initial focus on exploring the potential for blending to produce an attractive new product for our Chinese customers,” Fortescue said in an e-mailed statement Friday. “Substantive discussions on the detail of the arrangements are under way.”

In April, Vale’s Chief Financial Officer Luciano Siani Pires said the potential purchase of the 15 percent stake in Fortescue “is more of a theoretical possibility.” Speaking on an earnings call, he said: “We obviously do not have the resources, nor the balance sheet to do it right now.”

The blending deal envisions creating joint ventures to produce about 80 million to 100 million tons of the benchmark ore most in demand by China’s steelmakers to compete more closely with BHP and Rio. Rio’s Pilbara blend of about 62 percent content is the most-traded iron ore product globally.

‘More Competitive’

“We have very high-quality material coming that’s 66 percent,” said Alves. “To enjoy the best value for this ore, we need also the lower quality to blend. That’s how it works.” He added: “It can be very competitive I believe, even more competitive than the Pilbara blend.”

Rio’s Sam Walsh this month rejected suggestions the new product would erode the producer’s market. Of the 1.7 billion tons freely traded each year, Rio has an 18 percent share, according to the company, while Vale has the second-largest at 17 percent and Fortescue accounts for 10 percent.

Iron ore has have been on a wild ride in 2016 following three years of losses spurred by rising low-cost production. A speculative trading frenzy in China helped to lift prices above $70 last month from below $40 in December. Ore with 62 percent content in Qingdao was at $53.47 a dry ton on Thursday, according to Metal Bulletin Ltd.

Stock Surge

Fortescue has rallied 62 percent in Sydney this year, with its gains supported by iron ore’s advance, the planned tie-up with Vale, and moves to cut debt. The stock closed 3.1 percent higher at A$3.03 on Friday. In Brazil, Vale’s shares fell 1 percent on Thursday, trimming their gains this year to 16 percent.

“It doesn’t surprise me that Vale are a little more conservative, you are talking about two quite culturally different organizations,” said David Coates, a Sydney-based analyst at Bell Potter Securities Ltd. “When Fortescue said they’d be selling before the end of the year, that was a surprise.”

Fortescue’s delivery in the past year on promises to cut debt and costs has improved investors’ confidence in its management, according to Coates. Any delay to its proposed timeline on the blending venture may put that in jeopardy, he said. “The risks might be there a little to the management’s credibility.”

Before it's here, it's on the Bloomberg Terminal.