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Oct. 10, 2011, 5:39 a.m. EDT Vale to target China with Malaysia iron-ore hub
--Vale starts construction of iron ore transshipment hub in Malaysia
--Hub to provide cushion against stiff competition from Australian rivals
--Move follows failed attempt to set up distribution hub in China
KUALA LUMPUR (MarketWatch) -- Brazilian miner Vale S.A. VALE -1.01% has started construction of an ambitious iron ore transshipment hub in Malaysia, as the world's number-one producer ups its game in China, its biggest market, amid stiff competition from Australian miners which enjoy significant cost advantages because of their proximity to China.
The $1.3 billion complex that will include a pelletization plant, a jetty and warehouses in the northern state of Perak will become the base for Vale to service its Asian buyers, including China.
We "want to be closer to our clients in this region," said Marcelo Figueiredo, portfolio director for Vale's projects in Oman and Malaysia.
The move is significant after Vale's unsuccessful attempt to set up a similar facility located at Qingdao harbor in northeastern China.
Vale's plan to for the Qingdao facility had become another flashpoint in the tussle between global iron ore suppliers and Chinese buyers over pricing of the steel making material.
Chinese steel mills opposed the Qingdao plan as they feared the involvement of foreign miners in local distribution will allow them to promote a spot market for iron ore, further strengthening their pricing power.
Despite fierce opposition from China Iron and Steel Association and individual steel mills, global miners Vale, BHP Billiton Ltd BHP +0.10% and Rio Tinto Plc RIO -0.94% have already switched to a quarterly pricing system, discarding the long-term, yearly contracts preferred by the Chinese.
Vale also faces rising competition from Australian miners, who have successfully negotiated a freight premium from Chinese buyers in recent years as its costs less to ship Australian ore to China. It currently takes about 45 days to ship ore to China from Brazil, but Australian producers are able to deliver ore in a much shorter time.
The Malaysian facility, which will be able to receive Valemax vessels - the world's largest dry bulk carriers with a capacity of 400,000 dead weight tons - is expected to limit this disadvantage, reducing Vale's shipping costs substantially, Figueiredo said.
The new facility in Teluk Rubiah will have an annual throughput capacity of 60 million tons when operations commence in 2014, and will eventually handle up to 200 million tons annually.
"Teluk Rubiah is located at the entrance of the Straits of Malacca and has a perfect position on the shipping routes between Brazil and the rest of Asia," Figueiredo said.
Moreover, the port doesn't require dredging to receive the large Valemax ships, he said.
Vale's Teluk Rubiah plant is crucial to the mining giant's ambitious goal to boost its global iron ore output to 469 million tons by 2015, an annual goal the company set in 2009. Of this, about 130 million tons will be sold to China.
Vale's total iron ore output reached 308 million tons in 2010 and the company is targeting a moderate increase of 1% to 310 million tons this year.
FMS Price at posting:
26.8¢ Sentiment: Buy Disclosure: Held
