Mining and Heavy Industries

Vale’s cost cut welcomed by FMG

Vale Brazil iron ore carrier. Photo: Vale

Brazilian miner Vale’s decision to cut 30mt of high-cost production has been welcomed by Australian producer Fortescue Metals Group, but with plans to replace that production with low-cost iron ore, Vale is set to get more competitive with major Australian producers.

A senior Vale executive on Monday confirmed the Brazilian giant planned to get rid of between 25mt and 30mt of existing production in response to the softer market for seaborne iron ore.

But the company plans to maintain a supply target of 340mt in the 2015 calendar year, meaning it will replace that lost production with new, lower-cost production as it comes online.

Ultimately the announcement from the world’s biggest iron ore miner doesn’t change the amount of iron ore set to be supplied to the already over-supplied iron ore market. But with Vale set to produce the same amount of iron ore, at a lower cost, it will become more competitive with major rivals Rio Tinto and BHP Billiton.

Fortescue – led by colourful chairman Andrew ‘Twiggy’ Forrest – has criticised Rio and BHP for flooding the market with cheap iron ore while demand in China was slowing down. Executives from Rio and BHP have responded, saying higher-cost producers like Fortescue got into an unrealistically inflated market, and were now suffering as the market moved back to its natural equilibrium.

Fortescue chief financial officer Stephen Pearce spoke with The Australian this week, to use Vale’s production announcement to take another thinly-veiled shot at Australia’s two largest iron ore producers.

“It puts to rest this argument that ‘if we don’t expand, Vale will’ that some of the majors have been using,” Pearce was quoted by the News Corp broadsheet.

“It’s good to see a major supplier being disciplined about how they’re allocating capital and we view that as being responsible behaviour in the current market place.”

Earlier this year Fortescue urged the Federal Government to undertake a competition inquiry over BHP and Rio’s alleged intentional flooding of the iron ore market with oversupply.

BHP boss Andrew Mackenzie in May publicly shot down the inquiry push, telling Radio National: “In 2006 the price of iron ore, relative to today, was about 20-25% lower. At that time, Fortescue was more than prepared to invest.

“We now have a price that is actually 25% higher than it was in 2006. At the same time, we have worked very hard so our costs are now about 30% lower.”

Mackenzie indicated that BHP has – like Vale – made sensible moves to adjust to the downward trending iron ore market.

“We have two berths in the [Port Hedland] inner harbour that we have chosen not to develop,” he said. “[Andrew Forrest] has developed his berth … What you’re asking us to do is effectively run our plants at half capacity. That would cripple us in terms of costs, and you would never expect that to happen.”

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