Brazilian mining company Vale SA has signed independent ore contracts with Chinese steel mills for fixed freight charges to further expand its presence in the mainland, ahead of next year's benchmark iron ore pricing negotiations.
Some Chinese companies are believed to have signed three to four year price contracts with Vale for fixed freight charges which are 20 to 30 percent lower than normal rates, said an executive with a State-owned steelmaker.
Vale is also believed to be bringing forward a series of plans like output expansion, a new distribution center and the construction of 16 large ore carriers to reduce transportation costs between China and Brazil. The executive, however, refused to disclose any further details on grounds of confidentiality.
Vale's distribution center for the 400,000-ton ships may be established at Qingdao. The port has already started work on four 400,000-ton terminals, the first of which is likely to be completed by the end of next year, according to Chinese newspaper National Business Daily.
Unlike BHP and Rio, which ship ore from Australia, Vale needs to transport iron ore from Brazil, resulting in much higher freight costs.
Freight costs from Brazil to China were around $35 per ton yesterday, while the spot price of Brazilian iron ore was 850-860 yuan ($125) per ton.
To help reduce transportation costs, Vale plans to build the 16 huge carriers that are expected to trim costs by 30 percent compared to other small ships.
"The move underscores the interdependence between Vale and China," said Yu Liangui, senior analyst from consultancy firm Mysteel. "As a long-term strategy, Vale needs to stabilize its exports by reducing transportation costs to grab more market share in China from its rivals Rio Tinto and BHP Billiton."
Jiangsu Rongsheng Heavy Industries Group, a shipbuilder based in eastern China, will build 12 of the carriers for Vale by the end of 2010 or the beginning of 2011, local media reported.
Macquarie Group Ltd and JPMorgan Chase & Co have raised their forecast for annual iron ore contract prices after a surge in demand from China.
Australian benchmark iron ore prices may rise 30 percent, Macquarie analysts led by London-based Jim Lennon said yesterday in a report. That compares with their previous estimate for a 10 percent gain, according to media reports.
China increased iron ore imports by 12 percent last month to cater to the rising demand from makers of cars and appliances, it said.
Iron-ore demand from the United States and European steelmakers will also increase next year, the Brazilian company said recently.