Brazil's Vale Opens Malaysia Port in Bid to Cut Freight Costs

Brazil's Vale SA on Friday inaugurated a $1.4 billion port in Malaysia able to receive and blend iron ore from its mega-ships, an important step in the miner's battle to cut transportation costs to the crucial Chinese market.

Brazil's distance from China - which accounts for nearly 70 percent of the global seaborne market for iron ore - has been a distinct disadvantage in Vale's attempts to compete with closer Australian rivals BHP Billiton Plc and Rio Tinto Plc.

The port in Malaysia, as well as the giant ships known as Valemaxes, are part of a plan to address the problem. Its urgency has grown this year as the price of iron ore has tumbled 40 percent.

Vale said in a statement that the Teluk Rubiah terminal is able to receive and export 30 million tonnes of iron ore per year and will act as a "strategic point for the company in Asia to attend to our clients in the region."

Such a facility is particularly important as a two-year-long ban on Valemaxes docking at Chinese ports remains in force. Recent strategic partnerships with major Chinese shipping firms suggest Vale is approaching a breakthrough, but Chief Executive Officer Murilo Ferreira said on a conference call last week that it was still not fully resolved.

Teluk Rubiah and the Valemaxes should shave $3 to $5 per tonne from costs, according to Andreas Bokkenheuser, an analyst at UBS. The broker estimated it costs Vale $67 a tonne to produce and get ore with 62 percent iron content to China, with freight accounting for 33 percent of the amount. The iron ore spot price <.IO62-CNI=SI> was 75.50 on Friday.

The port also enables Vale to blend iron ore from its different mines to a quality that generates the most value. The company has long complained the market does not add enough value to its premium higher-grade iron ore from its Carajas mine in the Amazon.

At Teluk Rubiah, Vale will be able to blend this ore with less high-grade material to get what it says will be a better overall price.

"The idea is to sell a more average product but sell more of it, which I think makes sense," Bokkenheuser said.

"They'll prioritize the volume growth over an extra margin that they're not really getting," he added.

Vale's shares were up 0.7 percent at 1402 GMT.

(By Stephen Eisenhammer, Editing by Jeffrey Benkoe)