RIO DE JANEIRO: Brazil’s Vale SA, the world’s second-largest mining company, expects a quick recovery in the price of iron ore after the cost of the key steel ingredient tumbled by a third in the past two months, a senior executive said on Thursday.

Because the drop was the result of excess supply rather than weaker demand for iron ore, a price rebound should come before mid-October, Jose Carlos Martins, who runs the iron ore business, told

Reuters.

Slowing growth in China and European debt problems have raised concerns that a weaker global economy could reduce demand for Vale’s metals and minerals. As prices have fallen, Vale has said it is reconsidering the timing of iron and other mining investments.

“I was surprised by the decline,” said Martins. “I didn’t expect it to fall below $110 a ton.”

With the price of high grade iron ore in the Chinese spot market at $88.70 a ton, the cost is below the production cost of at least 30 percent of world producers, Martins said. When those producers drop out of the market, he expects prices to rebound to between $120 and $180 per ton.

“Below $120 many iron-ore producers can’t make money, and above $180 a ton steelmakers have problems,” he said.

Vale’s stock has also slumped with iron prices, falling 17.5 percent in two months to its lowest level since September 2009.

Martins said production costs at Vale, the world’s biggest iron ore miner, are still well below current prices.

“We are one of the most efficient producers,” he said. “We will be the last to leave the market.”

Martins, who is also Vale’s senior executive responsible for strategy, bases his expectation of an iron ore price rebound on Chinese steel and iron ore statistics.

Some analysts have said the iron ore price drop reflects concerns of slowing growth in China as the country tries to cool its overheated real estate market.

Martins disagrees. There is little evidence, he said, that steel production or iron ore demand is falling in China, the world’s largest steelmaker and Vale’s biggest consumer.

Chinese steel production rose 3 percent in January to June, compared with the same period in 2011, he said. At the same time Chinese iron ore imports rose nine percent.

Martins said the numbers, taken together, “are a sign that imported ore is beginning to replace local ore.”

Demand is also likely to pick up as Chinese steelmakers draw down their stocks of iron ore, Martins said. Steelmakers have less than a month of supplies on hand and companies, especially in northern China, may need to rebuild stocks to higher levels for the winter.

“There is a tendency to have more iron ore on hand at that time,” he said.

Snow and freezing temperatures can clog or ice-in ports and disrupt railways leading to iron ore supply disruptions. Still, Martins said it is hard to predict when prices will rebound.

“Supposing the high-cost producer was in Brazil, it would take 45 days for its goods to reach China,” he said. Most high-cost producers are not in Brazil and are closer to the Chinese market, he added.

While Vale is maintaining output, its mix of iron ore products has changed a bit as a result of the price drop, Martins said. Demand has fallen for higher-cost pellets, made by processing and agglomerating fine ore powder into larger nuggets.

As prices fall, Vale is focusing on cutting costs. A key part of that is the company’s fleet of ore carrying ships which include giant 400,000 deadweight ton (DWT) Valemax carriers.

Vale now moves 70 percent of its exports in its own ships or those of third-party ship operators who have signed long-term contracts to move Vale’s ore around the world.

The ships cut freight costs to China, helping Vale fight the transportation advantage that Australian iron ore competitors such as BHP Billiton Ltd. and Rio Tinto Ltd. have by being closer to the world’s largest iron ore market.

Some of the largest ships afloat, the Valemaxes were banned from Chinese ports after Chinese shipowners complained the ships had taken lucrative business away from them. Others worry the vessels may not be safe.

Martins said he hoped the ban would be lifted soon. China’s transport ministry has already approved Valemax-sized berths at its eastern Ningbo-Zoushan port, he said, suggesting China will eventually accept the ships.

Most of the vessels have also been built in China with loans backed by Chinese development banks, Martins added.

To help get around the ban, Vale expects to open a second floating ore transshipment vessel in Asia by February 2013, Martins said. Its first vessel began operating in the Philippines in February.

Valemaxes use the ship to transfer their cargoes to smaller vessels for the final journey to China, Martins said.

“We can’t be captive to a decision we have no power to make,” Martins said. “The distribution centers are more expensive than going direct to China but they are still better than the old system.”

The last time iron ore prices were so low, in 2009, Martins said Vale had to stop some mines in Brazil because there were no ships to pick up ore at Brazilian ports.

“They were all in China,” he said.

FROM: REUTERS