From Deutsche:
Blending: The conceptual plan is to produce 80-100Mt of blended product. This may involve combining 40-60Mtpa from Vale’s 65% Fe low impurity (2% SiO2 , 1.7% Al2O3 ) Carajas product with 40Mtpa from FMG’s low grade 57% Fe “Super Special” high impurity (5% SiO2 , 2.8% Al2O3 ) product from Cloud Break. This would produce a 61% Fe blend that could compete with Rio’s “Pilbara Blend” (61.5% Fe, 4.2% SiO2, 2.3% Al2O3). We also think it would allow Vale and FMG to increase sales directly to the larger SOE steel mills. This scenario covers 25% of FMG’s 165Mtpa of production only. The blending would likely take place at China’s major ports rather than Vale’s Malaysian blending facility.
Lower costs: The current Cloud Break strip ratio is around 1.4:1. The Chichester hub SR is expected to average 1.6:1 from FY17-FY21. We think that blending “Super Special” fines from CB with Carajas may allow FMG to lower cut-off grades at CB again. With the assistance of the plant upgrades and automation, it is feasible that the SR could be maintained below 1.6:1 for longer in our view. This would be positive for all-in costs.
Mine investments: This may involve Vale taking a stake in CB. Future projects would likely cover deposits such as Queens (first production 2021), Serenity, Nyidinghu and the Western Hub (likely required from 2025). An agreement between the world’s #1 and #4 iron ore producers may have a few regulatory hurdles to jump, particularly with Chinese anti-trust authorities, although advanced discussions have likely already been held. We see few benefits for the Chinese steel industry apart from a more reliable/consistent feed source that may be beneficial for blast furnace efficiencies.
Europe will not like it, either.
