Vale, Cosco Sign Iron Ore Shipping Deal

Brazilian miner Vale SA reached a deal with China Ocean Shipping Co (Cosco) for transporting iron ore, a move that could help the Brazilian miner resolve a costly two-year ban on docking its mega-ships at Chinese ports.

Vale said in a statement that it would transfer ownership of four very large iron ore carriers of 400,000 deadweight tons to Cosco. It would then lease them back from Cosco, the state-owned parent of top Chinese dry bulk firm China Cosco , for 25 years.

The deal is part of a continuing effort by Vale to move away from owning its own vessels so it can focus on mining and shore up its balance sheet.

But this agreement could also pave the way for more productive negotiations with China over docking Vale's mega-bulk carrier known as the Valemax. China is the world's main market for iron ore.

"Cosco's ownership is likely to be beneficial for Vale in terms of facilitating calls at Chinese ports," said analyst Jayendu Krishna of shipping consultancy Drewry. "This of course will help immensely in terms of reducing its overall freight cost."

Vale's inability to dock its mega-ships at Chinese ports has frustrated the miner's attempts to reduce freight costs and compete with Australian-based rivals such as BHP Billiton and Rio Tinto, which are closer to China.

Chinese ship owners have opposed access for Vale's mega-ships, saying they could worsen a shipping glut and steal market share.

In May, Reuters reported the Chinese ambassador to Brazil saying China was interested in a partnership with Vale, the first indication discussions were progressing.

Then, the ambassador talked of the possibility of transshipment in China. This involves moving iron ore from the Valemax ships to smaller boats that then call into port. Vale is developing a transshipment center in Malaysia and already has a system in operation in the Philippines.

If, however, the Valemax ships could take cargoes directly to China, Vale would save about $7 a tonne over current costs. Australian iron ore producers have normally had a $10-per-tonne freight advantage over those from Brazil.

Any reduction in costs would be welcome in the current market, with the iron ore price at its lowest since 2009 due to a global glut in supply.

Vale said it would announce the value of the transaction after it closes. The company also said it had signed a long-term contract with Cosco to use 10 very large ore carriers, of similar size and to be built by the Chinese company, to transport iron ore from Brazil.