Fortescue-Vale alliance has roots in iron ore price rout
By James Regan
SYDNEY, March 8 (Reuters) - Senior executives at two of the world's biggest iron ore miners, Brazil's Vale and Australia's Fortescue Metals Group , first raised the idea of an alliance a year ago after a relentless slide in ore prices.
At the time iron ore was fetching under $50 a tonne, a quarter of its 2011 peak, and applying unprecedented pressure on profit margins.
Under the pact unveiled on Tuesday, the pair plan to blend up to 100 million tonnes of their ores in China, producing the benchmark product preferred by local steel mills and squeezing out a little extra margin in the process.
"It's the kind of arrangement that made immediate sense to everyone," said an observer close to the deal. "Vale gets paid market price for its higher grade ore and FMG (Fortescue) sees a bump-up in price for its lower grade ore and the mills get a specifically blended feed appropriately priced."
The deal fits with the Chinese steel industry's drive to modernise under a directive from Beijing, which includes maximising usage of imported raw materials.
China's no.2 steelmaker Hunan Valin, which holds 14 percent of Fortescue's stock, had "shot their hand up to take the first of these cargoes," said Fortescue chief executive Nev Power.
If and when Fortescue moved to forge a partnership with a bigger rival, it was always going to be Vale.
Of the four major global iron ore suppliers - Vale sits at the top and Fortescue the bottom - Vale mines the highest and Fortescue the lowest grade ore. Continuación...