Vale Reaches Agreement with China's Cosco for Iron Ore Transportation
Brazilian mining company Vale S.A (NYSE:VALE) has reached an agreement with China Ocean Shipping Co. (Cosco) for iron ore transportation, helping the company cut costs amid slumping prices for the metal.
The agreement calls for Vale to transfer ownership of four iron ore carriers (400,000 deadweight tons) to Cosco. The company would then lease them back for the next 25 years. In addition, Cosco will build 10 vessels of similar size to ship Vale’s iron ore.
“The deal makes sense to us as the company frees up some cash (in tough iron ore markets) and partners with Chinese players to help minimize any issue with the docking of very large ore carriers in China,” Banco BTG Pactual SA analysts Leonardo Correa and Caio Ribeiro said in a note to clients.
The deal is part of Vale’s continuing effort to scale back from owning its own vessels and realign its focus on mining and clearing up its balance sheet.
"Cosco's ownership is likely to be beneficial for Vale in terms of facilitating calls at Chinese ports," said analyst Jayendu Krishna of shipping consultancy Drewry. "This of course will help immensely in terms of reducing its overall freight cost."
Vale, which plans to double iron ore shipments to China in the next five years, currently supplies 12 percent to 14 percent of the country’s iron ore.
The agreement with Cosco would potentially pave the way for more productive negotiations with China over docking Vale’s mega-bulk carriers known as the Valemax. Currently, Vale is unable to dock the ships at Chinese ports because ship owners say they could worsen a shipping glut and steal market shares.
According to sources, the ban is expected to be lifted once the deal with Cosco is finalized.
Although Vale has yet to announce the value of the deal, the company plans to announce numbers once everything closes.
Copper, iron ore surge as Chinese investors unleash demand
The reopening of major industrial economies is sparking a surge across commodities markets from corn to lumber, with tin climbing above $30,000 a tonne for the first time since 2011 on Thursday.
In the wake of mounting evidence of inflation fuelled by higher raw materials prices, investors are also increasingly focused on when the U.S. Federal Reserve might start throttling back its emergency support.
Many banks say the rally has further to run, particularly for copper, which will benefit from rising investment in new energy sectors. Copper is at the highest in a decade, fueling bets it will rally further to take out the record set in February 2011. Steel demand is surging as economies chart a path back to growth just as the world’s biggest miners have been hampered by operational issues, tightening ore supply.
“The long-term prospects for metals prices are ‘too good’ and point to higher prices in the next few years,” said Commerzbank AG analyst Daniel Briesemann. “The decarbonization trends in many countries, which include switching to electric vehicles and expanding wind and solar power, are likely to generate additional demand for metals.”
Trading house Trafigura Group and several major Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. expect copper to extend gains.
Copper rose as much as 1.6% to $10,108.50 a ton on the London Metal Exchange before trading at $10,080 as of 4:07 p.m. in London.
Benchmark spot iron ore prices rose to a record, while futures in Singapore and China climbed.
The boom comes as China’s steelmakers keep output rates above 1 billion tons a year, despite a swath of production curbs aimed at reducing carbon emissions and reining in supply. Instead, those measures have boosted steel prices and profitability at mills, allowing them to better accommodate higher iron ore costs.
Spot iron ore with 62% content hit $201.15 a ton on Thursday, according to Mysteel. Futures in Singapore jumped as much as 5.1% to $196.40 a ton, the highest since contracts were launched in 2013. In Dalian, prices closed 8.8% higher.
Erik Hedborg, Principal Analyst, Steel at CRU Group commented: “Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise. Iron ore producers are enjoying exceptionally high margins as well, around two thirds of seaborne supply only require prices of $50 /dmt to break even.”
Still, some analysts including Commerzbank’s Briesemann expect a short-term correction as metals become detached from fundamentals. There’s also a risk that China could engage in policies that may cool demand for iron ore and copper.
The metals rally has boosted concerns about short-term Chinese demand. Some manufacturers and end-users have been slowing production or pushing back delivery times after costs surged, while weaker-than-expected domestic consumption has opened the arbitrage window for exports.
Tin climbed as much as 2% to $30,280 a ton on the LME, boosted by rising orders for the soldering metal. Tin is at the highest since May 2011, with a 48% gain this year making it the best performing metal on the LME.