The talks between Vale SA (ADR) (NYSE:VALE) and Fortescue over a joint venture have reportedly stalled with product pricing being the point of departure. Though the talks have stalled, it seems all is not lost because the companies could slowly come to an agreement in the future. However, a near-term deal now looks out of the picture.
Commenting on the JV talks, Vale’s executive called Peter Poppinga said that commercial discussions with Fortescue were dragging. With that, Mr. Poppinga hinted that a JV deal in 2016 was out of question.
It seems Vale SA (ADR) (NYSE:VALE) and Fortescue have disagreed on how to price their products.
A potentially transformative JV accord
After a period of talks, Vale SA (ADR) (NYSE:VALE) and Fortescue signed an agreement that would allow them to blend their products. The accord was designed to boost the marketing opportunity for Vale’s higher-quality output and raise the quality of Fortescue’s products.
As part of joining forces, Vale and Fortescue undertook laboratory tests of their products to see how best they could blend. Those lab works have been completed and the companies had moved to begin negotiations on how to price their products. That’s where the talks began to drag and then stalled.
However, both parties still remain hopeful that they can work out a deal. The problem is that coming to an agreement is not something that is going to happen in the near-term, at least not in 2016.
Weak commodity prices
The JV that Vale SA (ADR) (NYSE:VALE) and Fortescue mulled was supposed to give them an edge against the competition in a market where commodity prices have remained painfully depressed. Under the alliance, Vale was to acquire 15% stake in Fortescue valued at $1.1 billion. That investment would have given Vale a foothold in Australia and bring it closer to China, its key customer.
A tightening U.S. export market
Vale SA (ADR) (NYSE:VALE)’s JV with Fortescue is getting delayed at a time when the U.S. is trying to protect its domestic steel industry, a move that could limit Vale’s export market. The U.S. International Trade Commission (ITC) recently said that it has determined that producers in Russia, Korea, China and Brazil (Vale’s home country) were flooding the U.S. with cheap steel, thus frustrating local producers. Those exports will face steep tariffs to stop dumping their steel in the U.S.