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Vale's designs on China add to Rio, BHP drive for more iron ore

Published 16/07/2015, 07:00 am
© Reuters.  Vale's designs on China add to Rio, BHP drive for more iron ore
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* Vale fight back putting pressure on Rio, BHP

* Battle underway for larger share of China market

* Brazilian miner boosts ties with China, cuts costs

By James Regan

SYDNEY, July 16 (Reuters) - As Rio Tinto RIO.AX and BHP Billiton BHP.AX ship more iron ore than ever to China, the Australia mining giants face a fightback from Brazil's Vale VALE5.SA for market share that threatens to drive already weak prices even lower.

Rio Tinto and BHP, which will release quarterly production data this week and next, have been racing to keep up exports to boost profits while lower prices eat into margins.

They now face stiffer competition from Vale, which is also working its mines harder, after the world's biggest producer won approval for its giant Valemax ships to unload in China, cutting down on freight costs.

With a capacity of 400,000 tonnes each, the 34 Valemaxes are the world's biggest bulk carriers and twice the size of vessels used by Rio and BHP, but a ban on entering Chinese ports had severely curbed the cost efficiencies of the larger ships.

"BHP and Rio have been looking to raise volumes in this environment to maximise every tonne," said Morgans Financial analyst James Wilson.

"With Vale's new ships plying the waters and the price where it is, it will be full-steam ahead over the next quarter, with more ore than ever coming out."

Until recently, Rio and BHP have focused on displacing Chinese iron ore miners to capture market share as tumbling costs forced many of them to shut.

In the first five months of the year, Chinese imports of the steel-making ingredient from Australia were 242 million tonnes or 63.9 percent of total imports, up from the 58.7 percent market share Australia held in all of 2014.

Brazil has actually surrendered market share in recent years, with Chinese imports of 71 million tonnes in the first five months, or 18.7 percent of the total. This is level with 2014 but down from 22 percent in 2012.

But since late last year, Vale has been rebuilding its ties with China.

It has agreed to sell then lease back at least eight of its Valemax ships to Chinese firms and gained clearance for the vessels to dock at Chinese ports, ending a three-year ban and helping it to overcome higher freight charges by saving $4-$6 a tonne, according to industry estimates. ID:nL1N0YA1I5

The Brazilian miner also sealed a $16.4 billion expansion program in June with about $4 billion of Chinese financial backing that will allow the miner to produce an extra 90 million tonnes of high-quality, low-cost ore for shipment to China.

More immediately, Vale is replacing 25 million tonnes of higher-cost iron ore production with new, cheaper tonnes, while maintaining its 2015 target of 340 million tonnes, and has lowered its break-even price. ID:nL2N0ZT1JK ID:nL1N0YW118

"It seemed to take many by surprise during the recent fracas over iron ore pricing that China was negotiating directly with Brazilian iron ore giant Vale to build alternative supply," said Jose Blanco, chairman of the Australia-Latin America Business Council.

Vale plans to lift capacity by 36 percent to 450 million tonnes by 2018, easily eclipsing the additional combined tonnes BHP and Rio aim to put into the market as their expansions start to wind down.

"China apparently hopes to seek balance and increasing competition between its two biggest suppliers, and any costs cut by Vale which has higher logistics costs will help lower the cost curve for the whole sector," said Xia Junyan, an analyst with Everbright Futures in Shanghai.

PRODUCTION INCREASES

Iron ore .IO62-CNI=SI staged a modest recovery in June but tumbled to a decade low near $44 a tonne last week, a price at which only the big low-cost majors can make money.

Australian miners are still producing at full tilt.

Australian port shipping data shows a year-on-year 32 percent rise in shipments to China in the June quarter from Port Hedland, which handles a fifth of the world's seaborne iron ore.

"From our perspective, its all about return on investors' capital," said Neil Boyd-Clark, managing director of Arnhem Investment Management, which owns Rio and BHP shares.

"For these companies that can get that return through increasing production, it makes sense," he said.

Rio has vowed to lift output 16 percent to 350 million tonnes this year. BHP expects its production to rise 2 percent to 250 million tonnes.

RBC Capital mining analyst Chris Drew expects a 12 percent gain in Rio's June quarter output and an 11 percent rise for BHP versus a year ago.

"They are saying 'margins are down, so let's just push it out'," said Morgans' Wilson.

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