The numbers that Vale (VALE), the world’s low-cost exporter of iron ore, reported on July 30th for the second quarter of 2009 were ugly but expected. Operating revenue dropped by $300 million to $5.1 billion from the first quarter. Profit margins fell to 20% from 32% in the first quarter. Capacity utilization was a low 65%.

But it was the longer-term changes in Vale’s business that caught my eye.

Demand from Europe, historically the company’s biggest customer, for iron ore has plunged. To make up for that decline, Vale has increased sales to China. That effort has come at a cost: To compete with exports from Australia that cost far less to ship to China, Vale has been eating the freight costs on about 70% of the ore it ships to China.

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But it has been remarkably successful.  Vale’s sales of iron ore to China are up 40% from the 2008 levels and in the first half of 2009 made up 65% of the company’s iron ore sales.

The danger here is that Vale’s fortunes, already tied to China, are now even more connected to the growth of that economy.

The long-term opportunity, though, is that Vale will be able to keep a good part of this new trade with China even as temporary production problems at Australian producers get sorted out and even when European demand comes back.

With a huge expansion in production scheduled for the rest of the decade and with the company investing heavily to build its own fleet of cargo ships as a way to lower costs, it’s very clear that Vale isn’t planning to give any of its new business back to its competitors.

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