Australia's Fortescue Metals Group and Vale's proposed iron ore blending and investment plan allows for a range of benefits and may support Fortescue's goals in a future of iron ore oversupply, a Platts' analysis shows.
The deal revealed Tuesday may give Chinese mills with food for thought. New Brazilian-Australian iron ore blends are estimated by Chinese sources to be likely to lead to potential changes in usage of other iron ore products and impact other steel raw materials, cutting cost.
Through the deal, FMG may gain better insight into mills' usage and preferences. At the same time, feeding into a medium grade blend could ensure future demand for FMG's portfolio of lower iron content ores should peak steel be upon us and China starts slowing down ore imports and turns more to scrap.
European mills too may be interested in the joint proposal, but without direct access to the blending in Asia, their main concern and potential gains may come from improved supplies and access to Carajas and other Vale ores. Blends in China diluting Brazilian ores may potentially offer Europeans benefits in obtaining straight products.
Platts MVS believes blends would allow FMG to improve the value in use achievable for its materials. Mineral Value Service (MVS) is a specialist analytics unit owned by Platts providing iron ore and steel raw materials cost modelling.
"This is important strategically if FMG wants to remain competitive with the higher quality products of Rio Tinto and BHP Billiton," MVS senior analyst Alina Wills said Thursday.
"It could place the new product in a strong position in the long term if the Chinese steel market moves to producing higher quality steel, as many expect it to, in a transition to the new normal," she added.
MVS expects Vale to contribute ores with higher iron and lower alumina, resulting in increased productivity and reduced costs for furnace operators.
For Vale, the collaboration offers the opportunity to produce a medium grade product in larger quantities and preserve better products for when the market is willing to pay the premium for them.
The market is currently paying the smallest premium for iron content net of impurities, or gangue, since December 2012, based on monthly averages from Platts.
The Platts 1% Fe differential values de-correlate from benchmark iron ore fines on a dmtu basis when demand for higher iron grades is stronger.
The differential was greater when supplies of higher impurity grades made up a larger proportion of supply and before Rio Tinto, BHP Billiton and Vale expanded output of higher quality product.
The 1% Fe differential averaged at 76.6 cents dmtu in February, reflecting only a 1.59% premium as IODEX was $46.75/dmt, or 75.4 cents dmtu.
The premium for 1% differential over IODEX dmtu values was 16.11% in February 2015.
Penalties for ores with higher silica have plunged over the past year.
Furthermore, FMG's reliance on offtake from traders may have helped incubate the newer products and guarantee volumes as the company ramped up output.
But MVS argues the next phase of FMG's business as it reached a planned 165 million mt/year output could benefit from this tie up with Vale.
"The downside of relying on others can mean difficulties establishing exactly which mills are using the product and therefore the true value in use," Wills said.
Vale has experience blending ores in major Chinese ports since 2014 and at a transhipment center in Malaysia. "By working together the companies can establish a strong product brand in China, take control of the blending and distribution, while hoping this translates to a brand premium similar to that obtained by other market leading products," MVS added.
Jefferies investment bank analyst Christopher LaFemina believes one or more blending joint ventures set up by the partners could supply a total 80 million-100 million mt/year and improve price realizations for Vale by around $2-4/mt.
"The JVs would likely lead to lower delivered costs to China for both companies as well as higher realized prices relative to benchmark prices," he wrote in a report Tuesday.
