MANILA, March 8 (Reuters) - A planned tie-up between Brazil's Vale and Fortescue Metals Group, both leading iron ore miners, could make their supply more attractive for China's mills, improving and adapting quality at lower costs, Chinese steel players and traders said.
Vale and Fortescue, along with Rio Tinto and BHP Billiton, account for more than 70 percent of global iron ore exports, most of which go to China.
All four have been racing to cut costs as prices tumbled 70 percent over the past three years, and now have the most to gain as prices rally.
As part of the deal under discussion, Vale and Fortescue plan to blend up to 100 million tonnes of their ores in China, producing the benchmark product preferred by local steel mills.
"It's not a bad idea. It's not easy to judge the result but at the moment I don't have a reason to be against it," Li Xinchuang, vice-secretary general of the China Iron and Steel Association and also president of the China Metallurgical Industry Planning and Research Institute, told Reuters.
Vale produces some of the world's highest grade iron ore, but has long complained it does not fetch the premium its high quality iron ore deserves in the international market.
"Vale's problem, especially as demand stalled, has been that the Chinese buyers really don't care about its top notch ore," one trader with a Western merchant said.
Blending its supplies with lower grade ore from Fortescue could give Vale valuable market share in a competitive and stagnating market. It would bring grades down to a more standard quality, as China grows at its slowest pace in a generation and its industry becomes less energy and raw material intensive.
"We normally purchase ore with original grades, but if it's cheap, we will still consider buying it," said Zhang Wuzong, chairman of privately-owned Shandong Shiheng Special Steel Group Co.
Fortescue Chief Executive Nev Power said blending would take place at Chinese ports, adding talks had already taken place.
Yet the prospect of tie-up for two of the big four iron ore miners, has unsettled some in the industry. They warned on Tuesday that a deal would concentrate production in even fewer players, in a market already controlled by a handful of mining giants who have used a multi-year price rout to squeeze out smaller competitors.
"It means supply will be controlled by even fewer companies and there will be less bargaining power for steel mills," said a Shanghai-based iron ore trader who has sold Vale cargoes.
For now though, the state of the market would make that tough: "The iron ore market is oversupplied," said Li. "It's not easy to control." (Additional reporting by Beijing Newsroom and Henning Gloystein; Editing by Clara Ferreira Marques and David Evans)