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Brazil: China’s New Pilbara

Background

The “proximity premium” afforded to Australian iron ore companies and which provides a competitive advantage in the minerals sector, is under threat from Brazilian mining company, Vale. In June, the company announced ambitious plans to heavily invest in a global supply chain network.

Comment 

The Pilbara region’s primacy as the source of China’s seemingly insatiable demand for iron ore is in danger of being eroded by Vale’s emerging global logistical network. Australia enjoys a “proximity premium” on exports to China and other rapidly developing Asian markets, which allows it to capitalise on its abundant yet, by Brazilian standards, lower grade iron ore. This has forced Vale to discount its high quality ores due to Australian saturation of the iron ore market with high-alumina, high-silica ores.

Buoyed by the high price of iron ore, a senior Vale financial executive announced in early June 2011 that the company will ‘invest as fast as possible’, aiming to rival the current Australian concentrated iron ore oligopoly. 

This latest announcement came only weeks after Vale took delivery of the first of its fleet of new Chinamax very large ore carriers (VLOC). The VLOCs will have the capacity to transport 400,000 tons of iron ore, significantly higher than current capabilities. Vale is also developing new ports in Brazil and Malaysia, to assist in exportation and distribution. According to a Vale executive, this will enable the company to ‘maximise the efficiency of its operations and meet growing global demand, Vale is developing various initiatives to obtain economies of scale’. 

 In a case of “trade follows the flag”, China’s “going out strategy” has seen heavy economic and diplomatic investment in Brazilian and other Latin American companies. Ernst & Young, in a March 2011 report, argues that China has begun to shift its strategic direction towards Brazil, Ecuador and Africa. This point is illustrated by heavy Chinese state investment in infrastructure for the Superporto do Açu port project in Brazil and the Simandou iron ore project in Guinea.

Australia, and particularly Western Australia, must develop strategies over the next decade to retain its market penetration in the commodities market and remain competitive against growing pressure from other exporting states.

Liam McHugh

Strategic Analyst

FDI Northern Australia and Energy Security Research Programmes

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