Vale Steadfast After China Shields Ship Industry

Brazilian miner Vale said on Wednesday its plan to expand the world's fleet of very large ore carriers nearly five-fold has not changed since China banned the mega vessels in local waters to protect its shipping industry.

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China's Trade Ministry said on Tuesday ports in the world's top iron ore importer could not accept the so-called Valemax freighters that can hold enough iron ore to build more than three Golden Gate Bridges.

The ongoing tension over the world's biggest bulk carriers afloat underscores how the economic interests of the world's largest consumer of commodities — China — and one of the world's largest suppliers — Brazil — are often at odds.

China's ban is seen by analysts as a way to protect its shipping industry, which has been hard hit by the economic downturn and falling freight rates. Benchmark shipping rates have fallen nearly 70 percent since October, slashing revenue for shipowners worldwide.

But the largest iron ore miner Vale is unwavering in a plan to flood the world's shipping market with dry bulk capacity, after it got burned by sharp spikes in global shipping rates in 2007 and 2008.

"It was certainly about regaining control over the shipping industry," said Graeme Train, a Shanghai-based analyst at Macquarie. "It is fully incentivized to build a big fleet of ships to reduce the cost of shipping."

Full Steam Ahead

In its first statement since China banned the massive carriers, Vale

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[VALE  Loading...      ()   ] said on Wednesday it would comply with Chinese port regulations but its "schedule for the delivery of 29 additional (Valemax class) ships under construction has not changed."

Ironically, 17 of the ships under construction are being built in Chinese shipyards. Others are under construction in South Korean yards. The firms include Daewoo Shipbuilding & Marine Engineering, STX Pan Ocean and China Rongsheng Heavy Industries Group.

"Construction for these Valemaxes has started and we've started steel plate cutting for the ships," said Michael Cheng, a spokesman of China Rongsheng, which delivered the first of 16 carriers to Vale in November.

The company already has six of these Goliaths hauling ore on the highseas.

Vale said its megaships currently able to dock at the ports of Ponta da Madeira in Northeast Brazil; Sohar in Oman; Taranto in Italy; and Rotterdam in the Netherlands. The company is also using a floating offloading storage system of smaller ships in the Philippines and developing a terminal in Malaysia in 2014 to handle its megacarriers.

Chinese Shipowners

One of these Valemaxes, the Berge Everest, docked at China's Dalian port in December for the first time, and unloaded its iron ore cargo, to the chagrin of the powerful Chinese Shipowners Association that called on Vale to abandon its Valemax plans.

"By Vale controlling their own freight and wrapping up all the prices on a cost-and-freight basis, China would have lost control over the overall cost of shipping, which would have economic knock-on effects," Train said.

Vale said the objective of directly or indirectly building the fleet of 35 400,000-deadweight-tonne carriers is to reduce the freight and environmental costs of getting its iron ore over long hauls from Brazilian ports to clients in Asia and Europe.

Hu Yanping, a steel analyst at industry portal CUsteel.com, predicted China would reverse its ban on large vessels when the shipping market recovered. The downturn forced top Chinese shippers COSCO

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[1919.HK  Loading...      ()   ] and Grand China Logistics to halt payments to foreign shipowners last year.

China Cost

The decision to ban the giant vessels is a reminder of the difficulties foreign firms face in doing businesses with China, where the lines between politics and business are often blurred.

Trade publication Lloyds List said on Wednesday that excluding the Valemaxes, there were 26 Very Large Ore Carriers (VLOCs) above 300,000 tonnes currently in use, 11 of which docked in China at some point last year. Some crude oil tankers also exceed the deadweight tonne limit.

"The broader implication of this is we could see more of these erratic protectionist measures as cost pressures build in China and many if these state-owned firms see their profits squeezed over the coming months," said Peter Hickson, a commodities strategist at UBS Bank.