Brazil-based Vale SA (ADR) (NYSE:VALE) and Australia-based Fortescue Metals Group have struck an agreement on Tuesday though both sides have raised the idea of a tie up more than a year back. The agreement, which was reached following a significant drop in ore prices, would enable both to blend a maximum of one hundred million tons of their ores in China. The objective was to produce the benchmark product preferred by the domestic steel mills, and, at the same time, grab at least little additional margin.
Deal Fits Well For China Steel Industry
The agreement between Vale SA (ADR) (NYSE:VALE) and Fortescue Metals Group fit well for the steel industry in China as the government directed it to modernize. The directive included maximum usage of raw materials to be imported. The possibility for an alliance between the two companies dated back to 2013 when the Australian firm launched its second mining complex in Pilbara region of Western Australia, which was 125 miles from its Chichester Range original mines.
The Australian firm’s second facility enabled it to blend ore with high grades of iron. Aside from that, it also enabled higher levels of unwanted silica, as well as, alumina. Also, ore was bearing lower impurities though it might be fewer in iron richness. As a result, the company could product custom blended product specifically for the Chinese market.
Provides Avenue For Investments
The current deal between the two companies enabled Vale SA (ADR) (NYSE:VALE) to invest between 5% and 15% directly in Fortescue through the acquisition of shares on market. That does not mean its founder, Andrew “Twiggy’ Forrest, would lose its stake. The company indicated that he would still have a controlling stake of one-third in the mining firm. While Brazilian firm was the top iron ore supplier in the world, the Australian company miner has the lowest grade ore.
An observer, who is close to the deal, told the media that it was the arrangement that makes sense to everyone in the immediate term. Fortescue CEO, Nev Power, said that the relationship with Vale SA (ADR) (NYSE:VALE) was developed around the mutual interest of offering a strong supply base and a competitive consistent blend to China.