Vale Cuts Capacity As China Slows
Sydney Morning Herald
Monday November 3, 2008
BRAZIL'S Vale - the major competitor to Rio Tinto and BHP Billiton in the iron ore market - has slashed its annual production of the steelmaking material by 10 per cent, or 30 million tonnes, due to weak market conditions in China.
It marks the first time in years that one of the world's three largest iron ore producers has reduced capacity.The move will bolster expectations that the annual benchmark iron ore price will fall next year for the first time since 2002. Vale's chief executive, Roger Agnelli, said on Friday that his company thought it was prudent to idle some higher-cost, lower-quality capacity from its smaller Southern System mines.At an average grade of 66 per cent iron, what Vale considers "lower-quality" is still a premium product to the iron ore produced by Rio and BHP.Mr Agnelli said Vale would maintain full output at its larger, lower-cost Carajas mines in northern Brazil and would not discontinue spending on any of the company's growth projects."We had been working at 110 per cent, 115 per cent of our capacity [during the boom]," he said during a press conference. "Cutting 30 million tonnes is returning to normal."Vale will also shut down two pellet plants, representing 20 per cent of its iron ore pellet capacity, for maintenance. It estimates global steelmakers have cut their production by about 20 per cent from last year's levels in recent weeks. "It is not clear to us how long this will last," Mr Agnelli said. But he noted the credit crisis would remain intense for the next three or four months and China's economy was continuing to decelerate.Australian iron ore miners have reported difficult market conditions in recent weeks but Rio and BHP have yet to announce any capacity cuts.BHP is expected this week to receive a "statement of objections" from the European Commission saying its bid for Rio could give it too much influence on pricing in the iron ore market. Therefore, cutting production at this time would likely prove a strategic blunder.In a report released on Friday, Atlas Iron said it had still not been able to finalise any sales contracts due to credit restrictions placed on potential Chinese customers. But it is hopeful of striking a sale agreement shortly, to allow it to ship its first production from its Pardoo project next month.Mount Gibson Iron, which last month said Chinese customers were asking it to delay shipments, remains suspended from trading while it attempts to finalise new sales contracts.
© 2008 Sydney Morning Herald