Here it is again:
I think it safe to say that news of this got out yesterday and fired up the iron ore rally. Here are my thoughts:
- a blending agreement is no big deal. Vale might see that if it blends some of its high grade ore with FMG’s low grade ore that it will make more money if the high grade premiums are not there and it takes the lion’s share of blended revenues;
- it could be the result of a steel mill in China wanting long term security of supply on 62 blend ore and rather than blending the ore itself the two companies have come together on it;
- the more intriguing aspect of the deal is the potential cross-ownership which suggest the blending agreement is part of something larger;
- the blended ore will by necessity involve cross-marketing of the product so that may suggest a stronger integration of company functions which could enable control of supply at the margin;
- that seems very difficult to execute not least because it will entail someone cutting supply and which firm will it be?
- moreover, any hint of such will run afoul of Chinese regulators just as the BHP/RIO marketing JV did in 2010;
- for today at least this is a big deal for FMG given it could offer salvation on debt and upgrade its long term sub-par ore problem, as well, at minimum, offer the prospect supply discipline in the marginal cost producer;
- but then, that was going to happen anyway via price, right?
