In a move that will pressure BHP Billiton and Rio Tinto to update their plans, the huge Vale mining company of Brazil (formerly known as CVRD) has cut production or iron ore, nickel, aluminium and other minerals because of the slowdown in global demand, especially from the steel makers generally and the steel sector in China.
Vale is the world’s largest iron ore producer, heading Rio and BHP second and third, it’s also the world’s second largest nickel miner.
The decisions it revealed Friday night our time in Brazil are by far the most important so far from the mining sector and a recognition that the resources boom is well and truly over.
It was the second announcement in a week from the giant of cutbacks to the output of some of its key minerals: the week before it involved cuts to its nickel production over the next few months to try and right size output and demand.
Vale said it is cutting iron production by 30 million tonnes a year, equal to more than 10% of 2007’s output.
Vale had been expected to ship about 325 million tonnes of iron ore this year. But the company said an estimated 20% fall in global steel production from 2007 levels had resulted in a “direct and immediate” reduction in demand.
“We simply do not have the physical space to accumulate stocks of dozens of millions of tonnes of iron ore,” it said in a statement.
World spot iron ore prices have fallen from more than $US200 a tonne earlier in the year to around $US70 a tonne currently, which is less than the contracted price for high quality ores from brazil and the Pilbara region of Australia.
The cuts came only two days after it became clear in early talks in China that Vale, BHP and Rio are facing certain price cuts for the 2010 contract year for the steel industry contracts that start April 1.
Steel industry sources ay the price cuts could be 10%-20%, but even after the maximum, prices for 2009 will still be the second highest in history after the 85% price rise won this year by BHP and Rio.
They will be the first price cuts in seven years as steel production in China and elsewhere falls amid the global downturn.
Steel prices and output are falling in South Korea, Japan, the US, Russia and Western Europe.
The huge ArcelorMittal, the world’s biggest steelmaker, is reviewing output levels around the world.
It has already ordered a 15% global cut, closed furnaces in Europe and the US for up to six months, and cut output in Kazakhstan by a reported 30%.
That would be upwards of 2 million tonnes a year from the 6 million tonnes a year facilities.
It has closed half its furnaces in France and its closures in the US have helped shut 19 of the 25 blast furnaces operating in that country.
In India the giant has seen steel demand drop sharply, forcing it and other producers to cut prices since mid year, some by as much as 50%. That would mean most of the price rises from the start of the year have been given up.
That plant supplies steel to China and Russia and demand has slumped in the past two months. .
The steel giant is expected to detail more cuts and other plans when it reveals its third quarter earnings Wednesday night in Europe.
All in all the producers have won price rises of 300% in the past five years and any cut would be the first since 2002.
Vale said it would suspend production of iron ore from Saturday mines in Minas Gerais state in southern Brazil, where production costs were higher and the quality of iron ore lower than at its largest mines at Carajás in the Amazonian state of Pará.
In addition, two pellet production plants responsible for 20% of Vale’s production would be closed for maintenance, according to this translation of the company’s statement in Portuguese, on its Brazilian website.
Vale said employees will be sent home with pay, but it didn’t indicate how long the shutdowns will last.
The company will keep a ferroalloy plant in France idled until April, and a plant in Norway will extend its furnace maintenance until June. The two extended closures will result in a production cut of 600,000 metric tonnes of manganese ore and 90,000 metric tonnes of ferroalloy.
Vale said its manganese ore and ferroalloy operations in Brazil will be shut from next month through January.
Vale also is discontinuing its use of higher-cost thermal power generation in Indonesia, resulting in a 20% cut (About 17,000 tonnes) of nickel-in-matte output.
Its nickel refinery in Dalian, China, will continue running at 35% of its nominal capacity. Its cut was announced the previous week, along with delays to the commissioning of new nickel mines in new Caledonia and Brazil until well into next year.
One of the company’s Rio de Janeiro aluminum smelters, Valesul Aluminio, will cut back to a limit of 40% of its nominal annual capacity of 95,000 tonnes, and production at its Cadam subsidiary will be reduced by 30% because of falling demand for kaolin for paper coating.
