Vale's Upcoming Iron Ore Center in Malaysia Promises Cost Savings for Malaysian Steel Industry

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Researched by Industrial Info Resources (Sugar Land, Texas)--The iron ore pellets producing plant in Malaysia, which is being planned by the Brazilian mining company Vale SA (NYSE:RIO) (Rio de Janeiro, Brazil), is expected to offer cost savings for the local Malaysian steel industry when it comes into production, possibly in 2013.

Vale announced plans to build the plant in March 2008 and in June of the same year estimated that the plant would involve an investment of approximately $1 billion. The plant is planned to have the capacity to supply 6 million-7 million tons per year of pellets to steel manufacturers in Malaysia, Indonesia and other countries in the region, using iron ore from Brazilian sources.

Last week, the local Malaysian property company KYM Holdings Berhad (KUL:KYM) (Kuala Lumpur, Malaysia) announced that it had reached an agreement with Vale regarding the sale of 165.5 hectares of land in Manjung, Perak, for a price of $28.8 million. An additional area of 305.95 hectares is also available at the same location. However, this week the closing of the deal was reported to be uncertain, and Vale announced that it was still studying its options and declined to confirm the previous reports.

In an iron ore pellets producing complex, the iron ore is treated to produce a higher percentage of iron content by mixing with additives. The resulting concentrate is then shaped into pellets of a standard size, ready for use as feedstock for a blast furnace or a direct reduction plant.

Regardless of where the plant will be built, local steel manufacturers are hopeful that being able to purchase iron ore pellets produced at the plant will offer considerable savings in shipping costs. The Baltic Dry Rate commodity shipping index recently showed a sharp upswing following a dramatic fall in the middle of last year and currently stands at around 3,500 points. This equates to a shipping cost of about $35 per ton.

Presently, the local companies such as Perwaja Holdings Berhad (KUL:PERWAJA) (Kuala Lumpur), Ann Joo Resources Berhad (KUL:ANNJOO) (Petaling Jaya, Malaysia) and Lion Industries Corporation Berhad (KUL:LIONIND) (Kuala Lumpur) purchase pellets directly from Brazil. With approximately 1.5 tons of iron ore pellets required to produce 1 ton of finished direct reduced iron or hot briquette iron, the shipping costs saved because of Vale's production facility could be as much as $50 per ton.

Industry analysts are predicting that the Malaysian steel industry will begin to pick up, following poor results in the first quarter of this year, when losses of more than $135 million were recorded. Government efforts to stimulate growth are expected to lead to a rise in domestic demand for steel, as projects planned for the Ninth Malaysia Plan period began to come to fruition.

Another plus-factor for the steel industry is the growing demand for steel in infrastructure projects in China. Iron ore prices fell at the end of 2008, following a slump in steel production resulting from the global financial crisis, but a high rate of closures of supply coupled with stockpiling has resulted in China's imports rising steadily this year.

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