Another article reproduced courtesy of Bloomberg News. By way of a background briefing, shipping rates peaked in 2008 as China’s demand for resources outstripped the capacity of the world’s fleet to carry them. At the market peak for iron ore, Brazil’s Vale was paying over $80 per tonne in freight and ship owners were earning $300,000 a day on ships that cost about $25,000 a day to operate.
The freight market was a legalised casino and Vale was losing its shirt on every hand.
Their response was to create a fleet of 35 ultra-large ore carriers capable of carrying almost 400,000 tonnes of iron ore from Brazil to China. The economies of scale of these ships would reduce Brazil’s geographic disadvantage compared with the Australian iron ore miners.
Technically, these ships break all the records. However, Vale’s play was dependent on China building the port infrastructure necessary to unload these leviathans. China is playing its ace card now – the ships are not permitted to enter Chinese ports. Vale’s ultra-large ships are a technical masterpiece but politically represent an unacceptable shift of strategic control in China’s raw material supply chain.
Vale is endeavouring to mitigate the situation with hub terminals in Malaysia and the Philippines, where the iron ore will be transferred into smaller (180,000 DWT) ships. However the cost of rehandling and shipping 400,000 tonnes of iron ore eats into the fundamental economics of the strategy.
With the exception of the Chinese shipbuilders (Rhongsheng and Bohai), Vale has attempted to executed this freight strategy without a long term Chinese partner. With nothing to lose, China can block these ships indefinitely and with no discernable impact on its 500 million tonne iron ore supply chain.
The Antipodean Mariner hopes readers enjoy this well researched and insightful article from Bloomberg.
Bloomberg: China Shunning Biggest Ore Ships Shows $2.3 Billion Vale Mistake: Freight
The Vale (VALE) Brasil, the biggest commodity ship ever built, was designed to carry iron ore to China from South America. After six months in operation, it hasn’t done that once.
China’s refusal to accept the Brasil has derailed Vale SA (VALE3)’s push to control shipments to its biggest customer by building up a fleet of 35 ships, each almost as large as the Bank of America Tower in New York. Rio de Janeiro-based Vale, the world’s biggest iron ore miner, ships about 45 percent of sales to China, the largest consumer of the steelmaking ingredient.
Vale’s plan, which includes buying 19 vessels for $2.3 billion, has spurred opposition from Chinese shipowners who say it will worsen overcapacity, slumping cargo rates and industry-wide losses. Steelmakers are also likely against it as the ships would give Vale more control over pricing and delivery, said Chang Tao, a China Merchants Securities Co. analyst.
“Nobody in China wants Vale’s fleet to come,” he said. “Not shipping lines, not shipowners, not steelmakers.”
The miner may struggle to find alternative uses for all ships as no other markets are as big, he said. Vale also likely can’t cancel vessel orders or quit leasing contracts without paying “very heavy penalties,” said Ralph Leszczynski, the Beijing-based head of research at shipbroker Banchero Costa & Co.
“I’m pretty sure that Vale themselves have by now realized that they made a big mistake,” he said. “I find it really incredible that they committed so much money in this project without first getting written assurances from the Chinese side that they would be able to use the ships.”
Vale’s press-relations office in Rio de Janeiro declined to comment. The miner is buying vessels from China Rongsheng Heavy Industries Group Holdings Ltd. and Daewoo Shipbuilding & Marine Engineering Co. (042660). It will also lease eight from STX Pan Ocean Co. under a $5.8 billion 25-year deal, according to 2009 statements from the Seoul-based shipping line.
Vale’s then-chief executive officer Roger Agnelli oversaw agreements for the 400,000 deadweight-ton vessels to reduce a reliance on outside shipping lines and risks from changes in freight costs. The Baltic Dry Index, a benchmark for global commodity-shipping rates, fluctuated more than 40 percent on an annual basis every year except one from 2001 to 2010.
130 Million Tons
The Vale vessels are about twice as big as the Capesize ships that are now generally used to ferry commodities from Brazil to China. The miner plans to send about 130 million tons of iron ore on the route both this year and next.
The company is also investing $1.37 billion to set up a distribution centre in Malaysia that will be able to handle the very large ore carriers. Transferring cargo there to smaller vessels for shipment to China would likely increase freight costs, eroding at least some of the gains from the larger vessels’ size and fuel efficiency, said China Merchants’ Chang.
Vale has held talks with Chinese shipping lines about selling or leasing the about 360-meter-long vessels, Teddy Tang, the chief financial officer of its China operations, said in September. No deals had been reached.
The China Shipowners Association, whose members hold about 80 percent of the nation’s shipping capacity, has advised lines not to take the vessels, said Executive Vice Chairman Zhang Shouguo.
“The most important thing for Vale is to stop building,” said Zhang, a former deputy director in the transport ministry’s shipping division. “The additional capacity will exacerbate the already bad freight market.”
The China Iron & Steel Association has no position on suppliers’ shipping operations as long as they aren’t used to manipulate iron-ore prices, said General Secretary Zhang Changfu.
The ‘Vale Brasil’ was this week in the Arabian Sea headed for Oman, according to data on the Bloomberg terminal. The ship was handed over to Vale by Daewoo Shipbuilding in May. The Seoul-based shipyard has also delivered two other similar-sized vessels, as it works through orders for seven worth a total of $748 million. More deliveries will follow next year and work is progressing as planned, the shipbuilder said by e-mail.
Vale also ordered 12 of the very large ore carriers from Rongsheng Heavy for $1.6 billion in 2008. The Shanghai-based shipbuilder expects to deliver the first this month, said Chief Executive Officer Chen Qiang. The handover is about two months late because of certification issues, he said. The company has begun building the other 11 on-order ships, with Vale paying in installments as work progresses, he said.
“I am not worried about any possibility of Vale cancelling orders,” Chen said. “They need the ships to carry iron ore, and the vessels are greener and more advanced.”
Vale CEO Murilo Ferreira, who took on the job in May, this week named a new logistics head, Humberto Freitas, as part of a management reshuffle. The previous operations head, Eduardo Bartolomeo, will run the company’s fertilizers and coal unit.
Ferreira’s new regime may also herald a change in the approach to shipping, which could be announced at an investor day next week, said Rafael Weber, a Porto Alegre, Brazil-based Geracao Futuro Corretora analyst.
“They can’t fight with their main customer,” he said. “The company may decide against going ahead with it to avoid discord with the Chinese government.”
China’s Transport Minister Li Shenglin said earlier this month that the government will strengthen control of vessel deliveries and “guide the orderly arrival” of new ships amid tumbling rates and losses for shipping lines. China Cosco Holdings Co., the nation’s largest sea-cargo carrier, lost 4.8 billion yuan ($755 million) in the first nine months.
The 'Vale Brasil' was diverted on its maiden voyage in June from its original destination of Dalian, China to Italy after a request from a European customer and because “draft services” at the Chinese port weren’t ready, Ferreira said in July. The ships will “undoubtedly” go to China when needed, he said.
The ports of Dalian, Qingdao and Majishan near Shanghai are able to handle Brasil-sized vessels, Vale said in June. Qingdao, northeast China, hasn’t opened its facility because of “restrictions,” Li Yuzhai, a spokesman for Qingdao Port (Group) Co., said yesterday.
Calls to Majishan port yesterday went unanswered. Dalian Port PDA Co. (2880)’s press office referred enquiries to the company’s iron-ore handling unit. Calls there weren’t answered. A call to the ministry of transport wasn’t answered.
STX Pan Ocean has begun operating one of its eight VLOCs for Vale. The vessel is awaiting loading in Brazil, the shipping line said by e-mail yesterday. No changes to its agreement with Vale are expected, it said. The shipping line’s vessels are being built by affiliate STX Offshore & Shipbuilding Co. (067250)
BW Group, Oman
BW Group will also operate four vessels for Vale, the miner said in 2007. One, the Berge Everest, was due to be delivered in September by Bohai Shipbuilding Heavy Industry Co., according to a statement on the website of BW affiliate Berge Bulk.
Rongsheng Heavy is also building four VLOCs for Oman Shipping Co., which will be leased to Vale and used to haul commodities to the sultanate. The vessels are all due to be delivered in the second half of 2012, the shipping line said by e-mail yesterday.
Still, Vale needs to use ships on China routes to fully utilize the fleet, and the country’s opposition to the vessels is unlikely to weaken, said Huang Wenlong, a Hong Kong-based analyst with BOC International Holdings Ltd.
“Once Vale moves its own iron ore, its control on the supply of iron ore extends into shipping, further diminishing Chinese steelmakers’ bargaining power,” he said. “That is a situation China doesn’t want to see.”
Jasmine Wang and Helen Yuan with assistance from Juan Pablo Spinetto in Rio De Janeiro, Kyunghee Park in Singapore, Michelle Wiese Bockmann in London and Tamara Walid in Dubai.
Editors: Neil Denslow, Vipin V. Nair.
To contact the reporters on this story: Jasmine Wang in Hong Kong at email@example.com; Helen Yuan in Shanghai at firstname.lastname@example.org
MAIB: ECDIS Safeguards ‘Overlooked, Disabled or Ignored’ in Grounding of Cargo Ship Off England - The UK Marine Accident Investigation Branch says that ECDIS safeguards were either “overlooked, disabled or ignored” in the grounding of a bulk carrier o...
1 hour ago