Port in a storm, part 1: Bad blow for Brazil's iron ore spot market

Commodity traders who do business with Brazil's iron ore miners on the spot market are concerned about the potential acquisition of a controlling stake in MMX by a major trader such as Glencore Xstrata.

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The Switzerland-based company was officially named by MMX, along with Trafigura, as one of the “several players” with whom the Brazilian iron ore miner has held discussions over business opportunities, including the possible sale of its shares and assets.

A majority stake in MMX would give Glencore Xstrata an iron ore mining operation that will be expanded to 29 million tpy from its current 8.6 million tpy.

It would also give it control of the 50 million-tpy iron ore Sudeste Superport, which is expected to come on stream by the end of this year on the coast of Rio de Janeiro state.

Acquiring the port would make sense for Glencore Xstrata, especially after its purchase earlier this year of a stake in Brazil’s Ferrous Resources, when it agreed to buy 20 million tonnes of iron ore from the company over the next four years. 

Limited port capacity
Ferrous Resources, like the majority of the iron ore producers in Brazil’s landlocked state of Minas Gerais, does not own port facilities at the moment and relies entirely on terminals operated by Vale and CSN at the port of Itaguaí in Rio de Janeiro state.

“Vale’s and CSN’s terminals are public concessions, and by law they have to offer about 15% of the volume they shipped in the previous year to third-party companies,” one Brazilian trading source said.

Vale usually carries out tenders twice a year, with different winners each time gaining access in the half-year to export about 750,000 tonnes each from the miner’s seaport terminal, making a total of about 3 million tpy.

MMX and Ferrous Resources won the tenders for the first and second halves of this year, with each being entitled to ship around 1.5 million tonnes in 2013, several sources said.

CSN, on the other hand, negotiates the sale of port shipping capacity directly with interested companies.

The problem is that capacity destined for third parties at these terminals is limited, sources told Steel First.

In 2012, Vale’s terminal shipped about 22.9 million tonnes of iron ore – already considering third-party material – while CSN’s total exports stood just a little above, at 25.1 million tonnes.

This means that, by law, there is port handling available for only some 7 million tpy of iron ore produced by miners in Minas Gerais. These include medium-sized and large companies such as MMX, Ferrous Resources, Mineração Usiminas, Gerdau and ArcelorMittal Brasil, as well as smaller, family-owned enterprises such as Minerita, Comisa and Ferro+Mineração.

Sudeste Superport
MMX’s Sudeste Port has long been expected to change this scenario.

Sudeste is a private port terminal, and therefore will not be legally obliged to ship iron ore from third companies.

But since MMX will not have enough of its own production to take up the port’s capacity of 50 million tpy during its early years of operation, it had been planning to ship third-party material via the port.

That is why both Minas Gerais iron ore miners and Brazilian and foreign trading companies have been looking forward to the port being commissioned, as this will “unlock a lot of material”, one trader based outside Brazil told Steel First.

“There are a lot of offers for us to buy iron ore in Brazil, but there is no [seaport] exit,” he said.

A trading company such as Glencore Xstrata, however, if it acquired the facility, would be unlikely to agree to let miners use the port, and would probably seek to buy their iron ore output itself.

“There’s no future for doing business [in the Brazilian iron ore spot market] if Glencore Xstrata buys the port,” the foreign trader noted.

A second iron ore trader agreed.

“If Glencore Xstrata or Trafigura buys the port from MMX, it will end the [iron ore spot] trading market in Brazil,” he warned.

One Brazilian trader well connected with small and medium-sized miners in Minas Gerais said that the two major trading firms have been fully evaluating the local market to analyse whether there would be enough ore to keep the port busy.

“They have been contacting everyone [in the Minas Gerais iron ore sector] to check their interest in closing deals for the sale of their output,” he said.

“It will be terrible if Glencore Xstrata gets the port,” he added.

See also: 
Port in a storm, part 2: Sudeste super-mess 
Port in a storm, part 3: Sudeste – a poisoned chalice?

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