Vale Cutback May Strengthen Its Hand In Price Talks

A stiff cutback in iron ore output by Brazil's Vale could strengthen the company's hand in tough price talks with Chinese steel mills.

The company announced a year-on-year production drop of 37 per cent to 46.9 million tonnes for the first quarter of 2009.

“The emphasis is on operational flexibility, complemented by the priority given to minimising cost,” Vale said in its quarterly production report.

But the cost-cutting measures should also shrink global high-quality ore supplies and aid Vale’s bid to protect itself from a sharp price decrease this year.

Michael Zhu, president of Vale’s China unit, said the company was currently selling iron ore to the Chinese market at a provisional price equal to 80 per cent of the 2008 benchmark, with any price difference payable once a new benchmark is set, and backdated to April 1.

Mr Zhu noted that Chinese steel mills have sought a provisional price equal to only 60 per cent of the old benchmark.

Despite Chinese reluctance to settle without a large cut in iron ore prices, the country’s rising demand may force it to moderate its bargaining position.

Mr Zhu also noted the company’s intention to cut ore mining output by at least 25 per cent during 2009.

He described China’s iron ore demand outlook as healthy and said that Vale’s April ore exports to China were robust.

Brazil accounted for about 20 per cent of China’s monthly imports of iron ore in March. Vale is responsible for most of the total.

In its report, Vale also offered another clue to the buoyancy of Chinese demand.

Vale said steel output across Asia fell just 8.9 per cent in the first quarter, despite Japan’s recession. This would indicate continuing strength in Chinese demand, considering North American steel output fell 52 per cent and European output fell 44 per cent.

Furthermore, Vale said its first-quarter copper output was unchanged year-on-year, aided by Chinese consumer demand for durable goods.

Vale is regarded as one of only a few efficient iron ore miners that can make a profit at current low prices. Iron ore is selling on spot markets at around $US60 a tonne, compared to as high as $US200 last year.

Vale stepped back from negotiations aimed at setting an international benchmark price earlier this year, preferring to let Australia’s Rio Tinto and BHP Billiton take the lead in the talks.

Source: The Australian