Vale to expand iron ore output with eye on China

Brazilian mining giant Vale SA said on Tuesday that it will expand its iron ore production capacity to 450 million metric tons from the present 340 million tons in two years.

According to industry sources, the move will help the company gain a bigger market share, but it could also lead to an industry reshuffle and shakeout.

Murilo Ferreira, president and chief executive of Vale, said in Beijing on Tuesday that the company will raise its annual capacity by 30 percent in the next two years, especially to provide China with more high-quality iron ore products.

Though weak iron ore demand and low prices have hit the company in recent years, it does not plan to cut iron ore capacity. Instead, it will adjust output according to the market changes, said Ferreira.

"The Chinese government has come out with strict environmental protection laws, which require steel mills to reduce emissions," he said. "Vale is happy to provide iron ore products with high iron content and low impurity, thereby helping the Chinese government fight pollution."

As the world's biggest iron ore buyer, China has significant meaning for all mining companies including Vale.

Ferreira, as the head of the world's biggest iron ore producer, pays around four visits every year to China, and maintains good ties with Chinese iron ore buyers and equipment suppliers.

So do the heads of the other two Australian mining giants－Rio Tinto Plc and BHP Billiton Ltd.

China's economic slowdown has resulted in shrinking steel demand in the past two years. Coupled with rising global production capacities, iron ore prices have fallen from more than $100 a ton to around $55 a ton.

According to estimates from mysteel.com, a steel industry consultancy firm in Shanghai, China will import 978 million tons of iron ore this year, and the price will stay between $50 to $65 a ton.

Wei Zengmin, an analyst with the consultancy, said production costs of Vale are low due to Brazil's geological condition and rich resources, which means their capacity expansion can help the company gain better profits compared with the ones whose costs are higher.

According to Alan Smith, Asia president of Rio Tinto's iron ore unit, Rio Tinto plans to raise its iron ore capacity to 350 million tons by 2017.

"A number of medium and small iron ore producers will be unable to survive the falling prices as the giants keep increasing output with low prices. Thus, the large ones such as Vale, Rio Tinto and BHP Billiton will gain 'super margins' during the next bull market," Wei said.

He said the next boom in the global iron ore market will occur in 10 years.

During Premier Li Keqiang's official visit to Brazil in May, Vale signed memorandums of understanding with the Industrial and Commercial Bank of China, the Export-Import Bank of China and two leading Chinese shipping firms.

Under the terms of the memorandum, ICBC will provide Vale with up to $4 billion in "syndicated loans, bilateral loans, export credit, trade finance, among other potential financing arrangements and services."