Brazil-based Vale, the top producer of iron ore in the world, has forged an agreement with Fortescue Metals Group, the world’s fourth biggest producer, that will help Vale get a foothold in Australia’s Pilbara region by blending their ore which will in turn increase market share in China.
Reuters reported that the proposal will help the pair match the quality of iron ore produced by rival Rio Tinto, seen as the benchmark in China, and comes just as beaten-down iron ore prices stage a recovery to eight-month highs.
The two companies have been in talks for around a year for what would be the first deal involving the “big four” iron ore miners following a collapse in the price of the steel-making commodity in recent years.
Vale could buy between 5 and 15 percent of Fortescue Metals’ shares on market. The non-binding agreement would also allow Vale to take stakes in Fortescue’s existing or future mines. Joint blending operations in China could begin within six months.
“This is not any strategy to try and exert control over the market. It’s rather trying to capture value that exists there by creating a blend that ... we believe will suit our customers very nicely,” Fortescue Chief Executive Nev Power told reporters.
The joint venture, which plans to blend 100 Mt/a (110 million stpy) of ore, or 10 percent of the volume China imported last year, will need approval from China’s Ministry of Commerce.
Fortescue did not expect to run into any trouble with competition regulators, although analysts said opposition in China could be a big hurdle.
“There is no reduction in competition from this. If anything it improves the competitiveness of supply to the Chinese steel industry,” Power said, adding that the companies had already started talks with regulators.
The China Iron & Steel Association said it was too early to comment on the deal as the details of how it would work had yet to be finalized.
Vale produces some of the world’s highest grade iron ore, but has long complained it does not fetch the premium its high quality iron ore deserves in the international market.
Blending Vale’s ore with lower quality material from Fortescue would bring the grade down to a more standard quality, and create a better sintering product for Chinese steel mills, replicating what traders and the mills now do for themselves.
Vale is in the process of phasing out higher cost, lower quality production from its older mines in Minas Gerais state.
Fortescue, which has been racing to cut costs and slash debt to help weather the collapse in iron ore prices over the past two years, said it did not consider issuing new shares to Vale despite $6.1 billion net debt.