Brazil's Vale Discounts Iron Ore to Sell

Brazil's mining giant Vale said it is selling iron ore at a 20% discount to 2008 benchmark prices, a strategy that analysts say will boost the miner's sales amid weak demand.
Vale, the world's largest iron ore miner, competes directly with Australian rivals BHP Billiton and Rio Tinto, which are reported to be selling ore at spot prices rather than holding clients to predetermined benchmark rates.
This may be more attractive to clients in the steel sector, who may be uncertain of the economy's direction in the short term.
Vale insists it does not sell on the spot market. The provisional discount should help it keep market share until new annually revised term contract prices are set with the big steel makers, who have been demanding a 40% cut in prices, or more, from 2008 levels.
"Vale does this as a way to stir up demand, since the fourth quarter sales were very weak," said an analyst at investment bank Banif, who declined to be named. "Vale has been practicing this type of sale in the first quarter."
Vale told reporters in February during a conference call on its fourth-quarter results that it had signed on several new Chinese clients to iron ore supply contracts and was set to ship a record amount of iron ore to Asia in the first quarter.
Vale is scheduled to report its first quarter results on 6 May.
Analysts say the discount is not the end of Vale's commitment to the benchmark system, in which the world's largest iron ore miners and steel makers agree upon a fixed annual price for ore deliveries.
Instead, they say it is a temporary measure to improve sales that were dented by the global financial crisis and falling demand for steel.
Interim measure
New term prices normally take effect from 1 April but price changes are applied retroactively if they have failed to reach a deal by then, as happened this year.
Vale said in a statement to the market on Monday that it is being flexible on ore term prices on a provisional basis, allowing clients to pay 80% of the 2008 benchmark price for shipments and to settle any balance once 2009 prices are set.
Demand for iron ore has weakened since the global economic crisis took hold last September as industries reduce their output and requirements for steel, the main end use for iron ore.
Offering a discount is normal under these conditions, "it's just that the new term price has not yet been set," said Pedro Galdi, an analyst at SLW Corretora, adding Vale was unlikely to start selling on the spot market or abandon the benchmark.
"It will be another unexpected year with the industry granting a discount until the price is set," Galdi said. "The spot price reflects the high and low price, that is, the volatility.
"So, at first the Chinese client may win, but at some point he will shoot himself in the foot because the economy will recover and the spot price will be much higher (than the benchmark)."
Brazilian 2008 contract iron ore prices range from around $76 to $92 per tonne, depending on the mine. Spot iron ore prices soared as high as nearly $200 a tonne in February 2008, then tumbled as low as around $60 a tonne in October as the financial crisis deepened.
Cristiane Viana at Agora brokerage sees Vale's decision to offer a discount as an indication that the iron ore mining industry is moving toward a mixed pricing model that will see more spot sales alongside trade regulated by contract.
"It's gradual. I don't see the change happening in the next two to three years but the companies will gradually have spot and long-term contracts," Viana said.