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Supply chain: Vale’s strategy to win on the Chinese market of iron ore

 

We remember that Vale invests in building the biggest vessels carrying iron ore to compete with the two companies Rio Tinto and BHP Billiton, which are based nearest from China. Brazil is 45 days’ sailing away from Chinese ports against only 10 days for Australian miners.

However, Vale did not expect the decision of China to block large carriers such as the Valemax. In December, the situation has been partially resolved since one Valemax was allowed to unload in the port of Dalian, in the north-east of China. The capacity of this vessels is approaching 380-400’000 tons. According to Rene Kleyweg of UBS “the cost of shipping a tonne of iron ore using a Valemax is $4-$5 cheaper than a conventional capsize ship”.

Actually, we don’t know how much does it cost to deliver at Chinese ports with a Valemax but rates per day for capsize were as low as $2,400 in December 2011. Vale sees economy of scale per ships because one Valemax equals more than two capesize ships!

Vale wants to develop vertically. They already owns railroad from the mines to the ports and obviously the ore from their mines. They are building new ports and are reengineering others in Brazil. Moreover, we know that they have launched a programme to build 35 Valemax among which 19 will be the property of Vale and the others long-term chartered. So prices they had to pay to third party services will be replaced as capital investment.

Given the time of travel and the length of delays that are killing profits, the strategy focuses on the logistic issue that will bring to Vale the possibility to offer attractive prices and high quality’s iron ore to their buyers in China.

 

Iron Ore futures curve

This is the Iron Ore 62% Fe, CFR North China (Platts) Swap Futures. The graph below shows the iron ore futures curve:

The Futures curve’s shape still the same as the previous week, namely in backwardation. But in facts, the futures contracts have been settled at about $ 2.00 more than before. This trend could be due to a return of investors. Effectively, they are closely watching government’s decisions and previsions in China and as it will maintain a tight credit policy, this allows and encourages more trade and consequently supports the growth’s rate.

 

Forecasts

Total imports were stronger than the expectations, since the General Administration of Customs reported that iron ore arrivals were up 5.7% over a year earlier (YoY) during January to February. Iron ore accounted for 64.98 million tons last month. If we take a look to the others commodities such as Copper or Crude oil too, we note that they have respectively risen from +106% and +18.5% (YoY). So we believe that China’s hunger of iron ore will increase even more for several months to pursue the economic development.

http://campus.hesge.ch/commodity_trading/?p=5059

 

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