Brazilian miner Vale looks to satisfy China's appetite for iron ore with new deep water port
Brazilian iron ore mining giant Vale is in talks with the Alcantara Port Terminal on Brazil's northern coast to increase iron ore shipments to China - a move that aligns with China's recent attempts to diversify its sources of the critical steelmaking ingredient amid a surge in domestic demand.
Alcantara offers a deep water port that could host so-called Chinamax or Valemax iron ore carriers - ships as big as some skyscrapers that can carry much more cargo than normal iron ore transport ships. Vale is considering an increase in the use of the ships after China last month approved four additional ports on its coast to host them.
In June, China imported record amounts of iron ore to satisfy a sharp increase in demand for steel products to supply the country's infrastructure and property building boom. About 60 per cent of that supply came from Australia, pushing up the price of ore to US$110 per tonne in July - a level not seen since August 2019.
Alcantara terminal's private operator, Grao Para Multimodal (GPM), which already has a 25-year concession contract to build and operate the port and the new Maranhao Railway linked to the port, has been in discussions with the miner since late last year over a potential take-or-pay deal - a contract that guarantees a certain amount of throughput of iron ore - and a certain level of capital investments. Although such a deal has not yet been reached.
Vale had previously revealed to investors that it was keen on the 25-metre-deep (82 feet) Alcantara port near Sao Luis in the state of Maranhao, although it was not the miner's only option for more port facilities near its northern mining operations.
Vale was also hoping its 30-year-old deep-berth port in the north, the Ponta da Madeira Maritime Terminal, could be expanded to ship more iron ore. But so far, it has been able to handle only about 200 million tonnes, compared with a target of 240 million tonnes, including 100 million tonnes from the company's huge S11D mine in the Carajas Mountains.
Along with Vale's improved second-quarter results revealed last week, and its renewed commitment to forge ahead with an expansion of production at its northern mines, Ponta da Madeira's capacity shortcomings and China's four new deep-berth ports could be the game-changer, GPM executive director Paulo Salvador said.
"Vale's Valemax [massive ore carriers] were Brazil's creation to bring its mines closer to China. So, the approvals of the four deep berths in China are a vote of confidence in [Vale's] ability to supply quality iron ore. We think it is important for China to have diversified suppliers," Salvador said.
"We think it would be in China's interests to have options other than [mainly] Australian iron ore, and to become less dependent on them - a situation which could increase [risks] such as high costs and uncertainties in supplies."
China's approval of four new deep-berth ports two weeks ago to accommodate Chinamax-standard "very large ore carriers", which can carry up to 400,000 deadweight tonnes (DWT) of ore - an area which Vale dominates with its Valemax ships - was a crucial signal from China that Brazilian deep-berth ports such as Alcantara could support a larger iron trade between the two countries, Salvador added.
The four new Chinese terminals will be located in Rizhao, Yantai and Lanshan cities in eastern China's Shandong province, and in Sanduao, Fujian province, in the southeast.
"China imports 900 million tonnes a year, and Brazil is not delivering what it is supposed to, so iron ore prices have gone up a lot, about 40 per cent, and present huge costs to Chinese steel mills," he said. "The Chinese demand is so great they are even considering risky projects in West Africa such as Simandou [in southeastern Guinea]."
Bigger Valemax capacity meant lower costs and shorter shipment times for the longer routes between Brazil and China, making Vale ore competitive with that of Australian miners, who mainly use smaller Capesize vessels - between 250,000 and 300,000 DWT - to ship the ore the shorter distance to China.
China's increased iron ore demand ties in with its surging steel production driven by an infrastructure and property construction boom following the restart of its economy after the coronavirus first struck the central Chinese city of Wuhan in late December.
The infrastructure stimulus has lifted iron ore demand and earnings of Vale and its competitors - Australian miners BHP, Rio Tinto and Fortescue - to record levels in the past six months.
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The approval of the four deep berths will not only help China secure more supply, it will also diversify its supply sources to include greater imports from more "stable markets" such as Brazil and Africa over Australia, which until now has benefited from its closer proximity with China, according to analysts.
China and Australia have been locked in a bilateral dispute since April, when Canberra called for an international investigation into the origins of the coronavirus.
The Brazilian supply is an important complement to Australian iron ore for China, particularly given that Australia's production is at full capacity, said Erik Hedborg, lead iron ore analyst for commodity market consultancy CRU Group. After Australia, Brazil is China's most reliable market, as smaller exporters such as India tend to hold on to most of their ore for their own reserves.
Brazil's northern mining system, with one of the largest reserves of high-grade iron ore in the world, has the potential to become a key iron ore resource for China, Hedborg said.
"For such an important resource, it's important for China to diversify its sources," Hedborg said.
Signing on Alcantara would not only help Vale bolster iron ore shipments from its northern mines, it could also accommodate future expansions by 50 million tonnes a year, though that ambition might not be realised, CRU Group said.
"We do believe [Alcantara] is a viable solution to increase Vale's northern system shipment capacity, which is currently just enough to cope with installed production capacity. However, to move forward with the project will depend on Vale's medium- and long-term strategy," CRU Group analyst Eduardo Tinti said.
The development of new deep-berth ports in Brazil has got the government's attention. On Friday, during a virtual meeting with members of the federal judiciary, Brazilian Minister of Infrastructure Tarcisio Freitas showed his support for the development of Alcantara and hailed its potential to lift Brazil's iron ore exports.
Aside from Alcantara, there are plans for other new ports in northern Brazil, such as the Sao Luis port in Cajueiro that is owned by a Brazilian company and the China Communications Construction Company, as well as Vila do Conde, which sits along the same coast as Alcantara. However, neither port is deep enough at this point to accommodate Valemax carriers.
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Salvador said Vale's commitment to Alcantara would also boost operator GPM's ability to secure further capital, particularly from Chinese investors.
The group has spoken to two Chinese rail companies, the China Railway Tenth Engineering Group and the China Railway 20 Bureau Group, as well as agriculture trading companies, but the lack of a completed contract with Vale stymied earlier discussions.
Alcantara's initial capital requirement is about US$1.5 billion for a new railway and port with an export capacity of 70 million tonnes of iron ore as well as 10 million tonnes of grains a year by 2024.
More capital would be needed to take Alcantara to its full capacity of 140 million tonnes of iron ore, 40 million tonnes of grains and 10 million tonnes of fuels and fertilisers a year.
Salvador said GPM would push on with construction but hoped to get Vale's buy-in.
Vale declined to comment as discussions were ongoing.
This article originally appeared on the South China Morning Post (SCMP).
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