Vale Reaches Agreement with China's Cosco for Iron Ore Transportation

Brazilian mining company Vale S.A (NYSE:VALE) has reached an agreement with China Ocean Shipping Co. (Cosco) for iron ore transportation, helping the company cut costs amid slumping prices for the metal.

The agreement calls for Vale to transfer ownership of four iron ore carriers (400,000 deadweight tons) to Cosco. The company would then lease them back for the next 25 years. In addition, Cosco will build 10 vessels of similar size to ship Vale’s iron ore.

“The deal makes sense to us as the company frees up some cash (in tough iron ore markets) and partners with Chinese players to help minimize any issue with the docking of very large ore carriers in China,” Banco BTG Pactual SA analysts Leonardo Correa and Caio Ribeiro said in a note to clients.

The deal is part of Vale’s continuing effort to scale back from owning its own vessels and realign its focus on mining and clearing up its balance sheet.

"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, which plans to double iron ore shipments to China in the next five years, currently supplies 12 percent to 14 percent of the country’s iron ore.

The agreement with Cosco would potentially pave the way for more productive negotiations with China over docking Vale’s mega-bulk carriers known as the Valemax. Currently, Vale is unable to dock the ships at Chinese ports because ship owners say they could worsen a shipping glut and steal market shares.

According to sources, the ban is expected to be lifted once the deal with Cosco is finalized.

Although Vale has yet to announce the value of the deal, the company plans to announce numbers once everything closes.