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Freight and FX savings impact Vale and the iron ore industry

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Freight and FX savings

Lower freight costs will lower the CFR (cost and freight) for seaborne iron ore producers. It will have implications beyond just reducing the costs for the miners. Now, we’ll discuss the implications of freight and FX savings on Vale and other companies in the iron ore industry.

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Cost curve reordering

While the savings from freight costs decrease, oil savings and FX depreciation will benefit all of the players engaged in seaborne iron ore trade—including BHP Billiton (BHP), Rio Tinto (RIO), Vale (VALE), Cliffs Natural Resources (CLF), and Fortescue Metals Group (FSUGY). There are some differences that could lead to a reordering in the cost curve.

First, a decrease in freight cost isn’t impacting all of the miners at the same rate. Brazil is getting proportionately more of a benefit—compared to the Australian players.

Second, freight differences won’t benefit domestic iron ore producers much—especially the Chinese domestic producers. This will help exporters become more competitive. Considering the first point, the Brazilian exporters are still more competitive.

As far as FX gains are concerned, they aren’t distributed evenly across miners. The Brazilian real is depreciating faster than the Australian dollar. This will benefit Vale more than BHP, Rio Tinto, or Fortescue Metals Group.

Downside

Lower input costs are good for miners. This has positive results for other marginal and high-cost producers. Smaller iron ore players involved in seaborne iron ore trade will also benefit from the lower freight costs. They would get a new lease on life for a longer period of time—until the iron ore prices tumble to a new low. Then, sustaining with these lower costs would be difficult.

This definitely isn’t good news for big, low-cost producers. These players increased capacity to displace these high-cost, marginal suppliers out of the market.

The SPDR S&P Metals and Mining ETF (XME) invests in the stocks mentioned above.

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