Vale vows deeper iron ore cost cut as China's steel demand peaks

23 September 2015

Iron ore miner Vale said it will cut its production cost to less than $13 per tonne by 2018, as the world's largest producer of the commodity maximises profit margins in an era of weak prices.

A global glut and falling Chinese steel demand have dragged iron ore prices to less than $60 a tonne from a high of nearly $200 in 2011. The price is forecast to drop to $50 over the next two years, a Reuters poll showed.

"Vale is progressing to reach the lowest cash cost of the industry and will be competitive at any price scenario," Claudio Alves, global director of marketing and sales at Vale, told a conference in China's port city of Qingdao.

The cost reduction will come after the completion of Vale's 90-million-tonne expansion project known as S11D in the Brazilian Amazon, Alves said, as the miner focuses on producing more high-quality material.

Vale's overall cost stood at $15.80 per tonne by the second quarter.

That compares with $16.20 for Rio Tinto Ltd and $17.01 for BHP Billiton Ltd for the first half of the year, and $22.16 for Fortescue Metals Group Ltd by the second quarter, said Alves, citing estimates from the miners' latest profit reports.

BHP expects to reduce iron ore unit costs at its Western Australia operations by 21 percent to $16 per tonne in the 2016 financial year.


The end of the mining boom has forced Vale and its Australian rivals to focus on costs amid sliding iron ore prices.

China's steel consumption has already peaked, the China Iron and Steel Association said, as the world's biggest producer shifts from investment-driven growth to consumer-led growth, leading to record Chinese steel exports.

Shrinking domestic demand will boost China's annual steel exports to about 100 million tonnes over the next few years, said Zhang Dianbo, vice president at Baoshan Iron and Steel , which produces about 12 percent of China's output.

That is prompting miners to target potential growth from emerging markets. Rio Tinto is betting on new growth from countries like Vietnam, Thailand and India beyond existing buyers, said Alan Smith, head of Asia iron ore at Rio Tinto.

Australia's Roy Hill mine, 70 percent owned by billionaire Gina Rinehart's Hancock Prospecting and the last of the mega-projects planned in the boom, believes there's room for more supply.

Roy Hill is due to make its first shipment next month, having secured long-term sales contracts for more than 80 percent of its targeted output of 55 million tonnes with steel mills in China, Japan, South Korea and Taiwan.

"We'll be a cost-focused, margin-based business," said Barry Fitzgerald, head of Roy Hill Holdings Pty Ltd.