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Fortescue and Brazil's Vale are working on a special iron ore blend for the China market

A steel factory in Hebei, China. Kevin Frayer/Getty Images

Fortescue and Vale are jointly targeting the Chinese steel market in a deal which could see the Brazilian miner take a stake of between 5% and 15% in the Australian pure play iron ore miner.

The agreement is for a joint venture to create a blend of iron ore more attractive to the Chinese market, where a slowing economy and a glut in steel production has reduced demand.

Currently, steel mills buy ore from several different suppliers and then blend them to create exactly what they need to produce their brand of metal.

The Fortescue/Vale plan is to create a blend which will save Chinese steel mills time and money.

Vale, the 50/50 joint venture partner with BHP in the Samarco mine where a burst waste dam killed at least 17 people in November, and Fortescue have signed a Memorandum of Understanding.

Fortescue shares have been soaring on the back of a recovery in iron ore prices, rising 23.7% yesterday to close at $3.08.

“This new blended product will be developed to suit the long term needs of our customers and improve the efficiency of the supply chain to the steel industry,” the companies said.

“The agreement also provides a framework for potential investment by Vale in Fortescue through a minority acquisition of shares on market and/or investment in current or future mining assets.”

Fortescue CEO Nev Power says the memorandum will allow the companies to work together to deliver long-term value through the efficient supply of an “attractive and competitive” new iron ore blend in China.

There had been reports that Fortescue could be taken to task over continuous disclosure laws and that at least some of yesterday’s stellar share price rise was because the market had got wind of the Vale deal.

However, the company made a statement today: “Fortescue is aware of its continuous disclosure obligations to the ASX and the ongoing commitment to update the market, if and when, there are matters to disclose.

Ric Spooner at CMC Markets says the agreement has the market thinking about the potential for further collaboration including the possibility that Vale might take an equity stake in Fortescue.

“At this stage though, Vale has balance sheet problems of its own and is looking to sell assets rather than make acquisitions,” he says.

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