The Emperor's new clothes?

The Antipodean Mariner has been a frequently commentator on Vale's failing strategy to control freight from Brazil to China. The fleet of 400,000 DWT ValeMax ore carriers remain unwelcome on China's maritime doorstep.

Seen this week at Subic Bay are not one, not two but three laden ValeMaxes ('Vale Qingdao', 'Berge Everest' and 'Vale Rio de Janiero') plus three Capesize bulkers and Ore Fabrica.

From 10th August, when the AM watched 'Vale Qingdao' rafting up with 'Berge Townsend' and 'Ore Fabrica', it has taken 18 days to discharge the full cargo at an average of about 22,000 tonnes per day. Claiming 5,000 tonnes per hour, achieving less than 1,00 tonnes per hour.

With maybe US$600 million in assets anchored, how long can Vale continue to 'spin' the good news story that Subic Bay represents a viable trans-shipment alternative to China's deep water ore ports?

AM

Day 0 - Rafting up after 13 days anchored

Day 15 - Rafted with 'Samjohn Vision'

Day 15 - Vale Rio de Janiero (left) and Berge Everest (right) anchored
awaiting their turn to discharge with another two Capes to seaward.

Vale's letter to Lloyd List on ValeMax

In response to a comment on yesterday's post about Vale's charm offensive in China, here's the letter to Lloyd's List.

AM

388,000 DWT 'Berge Aconcagua', Oita Japan

Lloyd's List: Valemax issues clouded by misinformation

Monday 25 June 2012, 10:28

From João Mendes Faria

SIR, I refer to your article “Vale urges China to lift valemax ban” (Lloyd’s List, June 21) and would like to make the following clarifications.

First, Vale has never challenged the Chinese government ban on valemaxes berthing at its ports. We have observed that there has been a great deal of misinformation and speculation in both Chinese and international media. We have recently made efforts to provide factual information to interested parties and different government departments to address the mistaken information and claims widely circulated.

Second, the iron ore carried to Asia via valemax can be transhipped to Chinese or other Asian ports via our transhipment stations. A second floating transhipment station in Asia in early 2013 will double the transhipment capacity from the existing FTS in the Philippines up to 30m tons per year. At the end of 2013 our Malaysian transhipment centre brings the total annual transhipment capacity to 60m tons. Besides those locations the valemax fleet of 35 vessels can regular berth in Rotterdam, Taranto, Sohar in Oman and Oita in Japan. The whole fleet of 35 valemaxes, when ready by the end of 2013, will be able to transport around 55m tons per year.

Third, it is true that we have been in discussions with some Chinese shipowners for each to buy some of the 19 valemaxes which are currently to be owned by Vale. Due to mutual confidentially, we have never named any of the companies we have been in discussions with. It is also true that these discussions have slowed since the issuance of the Ministry of Transport Circular 13 in January. This is completely understandable. Chinese shipowners hope to understand the implications of the barring of the vessels, as we do.

Fourth, Vale and Cosco have had a long-term co-operative relationship for years and Cosco-operated vessels have regularly been carrying cargoes from our Brazilian ports. In the past we proposed to Cosco that they build and operate valemax vessels under long-term charter with Vale. Cosco chose not to, for their own reasons. We fully respect their decision.

Fifth, Vale is not in a hurry for the Chinese government to reopen access to its ports for the valemax ships. We understand that much misinformation must still be clarified.

Although we are not in a rush for Chinese berthing restrictions on valemax to be lifted, we do hope that it can be sooner rather than later. This is simply because the valemax can bring benefits to different Chinese players. Steel mills and iron ore traders will benefit by a more competitive iron ore market. Iron ore ports can double their throughput. This does not even mention the environmental benefits of 35% CO2 reduction per ton of iron ore compared to capesize.

Valemaxes are part of a long-term strategy to enhance market competitiveness in Asia and will be chartered for 25 years.

We are patiently engaging different Chinese stakeholders and agencies and have a high level of confidence that the eventual decisions that will be made will consider all aspects around the issues and the overall benefits to China and Chinese markets.

João Mendes Faria

Global Business Development Director

Vale

Ore Fabrica

The Antipodean Mariner is in Japan this week, where wi-fi access has been hard to find and postings have been a bit sparse.

Earlier this week, AM had the opportunity to have a look (from a respectable distance) at Vale's trans-shipment station Ore Fabrica in Subic Bay. She is awaiting the arrival of Vale Brasil on the 12th of February and commencement of ore distribution operations to China.

Sea Duchess as a VLCC before conversion

Ore Fabrica (fabrica means factory in Portuguese) began life as an oil tanker, Sea Duchess in 1993. Tankers make good candidates for conversion to ore carriers due to their centre tank hull construction and as a single hull VLCC her days of carrying crude oil were over. The conversion turns the centre tanks into ore holds and the wing tanks as ballast. Heavy stengthening is added to the under-deck structure to support the Liebherr cranes on the starboard side and travelling ship loader on the port side.

Ore Fabrica

The cranes are configured to be capable of plumbing the centre of Vale Brasil's holds and then back to the deck-mounted hopper. The conveyors are covered to control dust and the shiploader is mounted on rails to traverse the length of the deck. The conversion also incorporated upgrades to her accommodation and generating capacity.

Starboard side, five Liebherr cranes

Although she is anchored in the inner harbour, it is expected that the ship-to-ship mooring and unloading will take place in the outer bay. Ore Fabrica will be capable of three discharge modes - direct trans-shipment, discharge into her own ore holds and loading out of her holds to a receiving vessel. Vale Brasil will arrive with just under 400,000 tonnes of ore while Ore Fabrica has a corresponding deadweight of 280,000 tonnes. At least one, and up to three Capesize are going to be needed to take the full cargo if Vale is going to minimise the number of times the ore is handled.

Ship Loader with transfer conveyors

With the planned Malaysian land-backed trans-shipment terminal years away, Ore Fabrica is Vale's only Asian discharge port for the Chinamax VLOC's. With the remainder of the VLOC's entering service in the next two years, Ore Fabrica will working at capacity as the 35 ships haul ore eastward. Although a clever technical solution to the current political impasse, the AM doesn't believe that Ore Fabrica will be capable of keeping up with the relentless pace of Chinamax arrivals - one every three days? The AM still belives that a commercial solution, albeit with Chinese Owners snapping up some or all of Vale's ships at a discount, will see them discharging in Chinese ports as they were designed to do.

The Antipodean Mariner

VLOC's, China and Vale Beijing

The article below is re-posted from Tradewinds (31st January 2012) as China closes the door to any ore carrier larger than 300,000 DWT

China has officially nailed up a no entry sign at its ports closing them off to Vale’s VLOCs.

Beijing claims the move comes amid safety concerns linked to the giant vessels, but there is widespread belief the government is protecting its own shipowners and charterers.

“We are not optimistic about the safety situation of port operations for large ships, particularly the berthing operations of super large ships whose sizes are larger than design standards permit,” said the Ministry of Transport.

“Considering the sizeable hidden dangers, we have decided to adjust the port management system for the berthing of large ships.”

Its fresh stance comes only a few weeks after a VLOC owned by STX Pan Ocean sprang a leak while loading in Brazil.

Jeffrey Landsberg of Commadore Research said: "While today's announcement was issued by China's Ministry of Transport on the pretense of adhering to safety concerns, in reality the move is being made to aid Chinese shipowners and maintain leverage over Vale.

“Going forward, we continue to view the use of iron ore transshipment hubs as a positive factor as it will result in a larger amount of vessels being used to ship the same cargoes of iron ore.”

China has been under pressure from domestic owners who feared they were excluded from the VLOC project and were suffering as the vessels were stifling earnings in the sector.

George Lazardis of Intermodal told Reuters: "At the end of the day, they (China) want to support their own.

“They are not interested in whether Vale will be able to provide cheap imports in comparison to Australian imports.

"They are interested in giving support to their shipowners, which are starting to become a significant force over the past couple of years, and to help that part of the industry grow."

Macquarie commodity analyst Graeme Train told the newswire: "China is so dependent on imported raw materials that it has a structural incentive to destroy freight prices as much as possible.

"And Vale's strategy with the VLOCs was a direct threat to that because Vale would ... take the lower freight cost themselves, when really what China wants to do is to ensure that there's oversupply in the freight market and to take advantage of that for itself."

Vale will now turn its attention to a transshipment hub in the Philippines to make sure it has work for the bulkers, many of which are still under construction.

By Andy Pierce (Tradewinds reporter) in London

Photo below is Vale Beijing (from the website Maritime Bulletin) at anchor off Sao Luis, transferring cargo using a crawler crane from No.7 Hold forward to No.3 and No.5 Holds. She is already looking lighter aft after be-bunkering. Information on her intended repair location remains tightly held, though for what end now?

AM

Tradewinds: Vale VLOCs a "loss-leader"

If you ever needed proof that a Shipbroker could sell refrigerators to Eskimo's, read on. I'm sure Vale's Board of Directors are congratulating themselves now on cunning plan brilliantly executed.

AM

Vale VLOCs a "loss-leader" (Tradewinds)

Losses Brazilian mining giant Vale may suffer from selling its 19 very large ore carriers (VLOCs) might be a small price to pay to gain access for the behemoths to Chinese ports, according to ICAP Shipping’s James Leake.

The broker’s research managing director says Vale may have come in for unfair criticism from many commentators for its move into industrial shipping.

Attention has focused “purely on the shipping dimension and citing the likely thumping discount of current market values to original purchase prices,” says Leake.

But, he says the ”contrarian” view suggests that even in a worst-case scenario any loss would be “covered by the profit from the sale of iron ore from only one or two shipments in these vessels, even at current depressed ore prices.”

Added Leake:”Ultimately, this may be a small price to pay for the political capital that could be achieved by transfer of ownership to Chinese interests, with the endgame being the acceptance of these behemoths in Chinese ports.

“Vale, after all, is in the iron ore business first and foremost—this could prove to be the most extravagant loss-leading strategy of all time.”

Leake says the announcement that Vale plans to sell off its VLOCs with long-term charters back comes as no surprise.

Those vessels already delivered have not received approval to enter China’s ports.Also, one of the newbuildings, the 400,00-dwt Vale Beijing (built 2011), developed cracks in the hull while being loaded at Ponta da Madeira, northern Brazil.

Vale placed orders in 2008 for 12 of the so-called Valemax vessels for construction by Jiangsu Rongsheng Heavy Industries in China, plus seven more in 2009 at Korea’s Daewoo Shipbuilding & Marine Engineering.

A further 16 similar-size vessels have been ordered in China and South Korea for other companies for long-term charter to Vale.All are set to enter service by 2013.

By Geoff Garfield in London

Published: 11:02 GMT, 22 Dec 11 updated: 11:04 GMT, 22 Dec 11

Vale Beijing - who owns the problem?

'Vale Beijing is reported to have been succesfully shifted off the Ponta de Madeira ore berth to anchorage. The link to the Reuter story (below) has a photo gallery of the ship on the berth and judging by her deep laden condition there is a lot more than the 200,000 tonne of iron ore reported yesterday.

http://www.reuters.com/article/2011/12/06/us-vale-shipping-idUSTRE7B512120111206


Vale Beijing at Ponta de Madeira Terminal: Reuters


'Vale Beijing' under tow to anchorage at Ponta de Madeira: Reuters

Highlights of the story are that the vessel could not use her engines during the move for fear of worstening the structural damage, and that divers are examining the underater hull indicating that the cracking may not be confined to the ballast tanks and cargo holds.

The theme of this posting is who owns the problem. 'Vale Beijing' is owned and operated by Korean shipping line STX Pan Ocean, and at this point they will be bearing the financial pain of the ship being off-hire and the cost of repairs. These in turn may be recoverable from the ship's Builders, STX Offshore, through the 12 month 'new ship' warranty and her insurers.

Vale is suffering major damage to its brand and reputation due to the decision to put their name on the fleet of ValeMax ore carriers. Having your brand on such a visible asset is normally a marketers dream - until something goes wrong. The grounding of the 'Exxon Valdez' was the reason Exxon divested itself from ship owning, even though it remains the world's largest oil shipper.

The Antipodean Mariner predicts that this incident, along with the wrestle for control of the iron ore supply chain, will cause Vale to quietly debrand these assets. Four of the 'smaller' 388,000 DWT ore carriers built by Berge Bulk and chartered to Vale do not carry the Vale name, and this may prove to be the way forward.

The Antipodean Mariner

'Vale Beijing' cracking at Brazilian terminal

New is circulating that 'Vale Beijing', one of the new ValeMax VLOCs, has suffered cracking while loading at the Brazilian port fo Pant de Madeira. The crack is apparently in the No.7 Hold and water is flooding into the hold from an adjacent ballast tank. The ship was scheduled to load 384,000 tonnes of iron ore but loading was stopped when she had about 200,000 tonnes loaded and with about 20,000 tonnes in the No.7 Hold.

Sources have advised the Antipodean Mariner that the ship will be moved off the loading berth and her bunkers are going to be pumped off to reduce the risk of pollution. Ponta de Madeira is a loading terminal and there are no facilities to discharge the ore aboard 'Vale Beijing'.

'Vale Beijing' was built at STX Jinhae Shipyard Korea, owned by STX Pan Ocean and time-chartered to Vale. The vessel is on her maiden voyage and Ponta de Madeira is her first cargo loading.

The Antipodean Mariner

Ore Wars - Vale vs. China

More shots are being fired in the increasingly bitter dispute between Vale and China’s ship-owing interests (read the Chinese Government). Vale is irrevocably committed to their now-380,000 DWT ore carriers under construction in China and South Korea. To circumvent the ban on their ships unloading at Chinese ports, Vale is setting up transhipment hubs in Malaysia (a land-backed ore terminal) and Subic Bay (a floating transhipment vessel) to break down the large into smaller shipments which can enter China ‘under the radar’.


Conceptual model of Vale's Subic 280,000 DWT Transhipper

Sadly, it is a futile exercise for both parties as China needs Vale’s iron ore for its steel industry.
The following article is courtesy of Lloyd’s List.

The Antipodean Mariner

Lloyds List: China shipowners take off the gloves in Vale scrap

China Shipowners Association takes aim at Philippines and Malaysian transhipment centres

Tom Leander

Friday 2 December 2011

THE China Shipowners’ Association has taken aim at Brazilian iron ore giant Vale’s plans for transhipment hubs in the Philippines and Malaysia in the most stinging public rebuke yet against the miner, writes Tom Leander in Hong Kong.

CSA vice-executive chairman Zhang Shouguo also condemned Vale’s plan to float 400,000 dwt ships to bring down its transport costs into China as a matter of “monopoly and unfair competition”.

“Vale’s current task of top priority is to immediately stop its ambitious fleet expansion plan and especially cease the construction of 400,000 dwt very large ore carriers and other types of bulkers,” Mr Zhang said.

Earlier this year, Mr Zhang condemned global mining companies in general for seeking to control the price of transport, which he decried as monopolistic and unfair to Chinese shipowners, but did not mention Vale. The current statements go a step further. They signal that the gloves are off against the world’s largest iron producer in the dispute over its so-called Valemax vessels.

Four of the these vessels have been delivered, the most recent being the long-awaited dispatch of Vale China , the first 400,000 DWT vessel to be built in a Chinese yard. Vale’s plan has become so sensitive that Rongsheng Heavy Industries , which built the vessel, downgraded the size of Vale China and an order of 11 additional Valemax ships to be built in Rongsheng to 380,000 dwt.

Vale has yet to receive permission from local authorities to allow the Valemax vessels to enter China’s ports fully loaded. The inability to bring the Valemax vessels directly to China has prompted Vale to establish transhipment centres of iron ore in Malaysia and now Subic Bay in the Philippines. In September, Vale and the Philippines Subic Bay Metropolitan Authority signed a memorandum of agreement to build a transhipment hub by deploying a floating terminal to be located at the deepwater harbour near the Bataan peninsula. From the hub Vale plans to deliver its iron ore via feeder vessels to China, as well as South Korea, Japan and Taiwan.

Mr Zhang attacked the facility — and the one in Malaysia — as “violating the principle of optimising resource deployment”. He added, that “at present the existing fleet in the market is completely able to satisfy the iron ore shipping demand” and decried the “waste of resource” that the plan would bring about.

He also called into question Vale’s ability to run a fleet properly. “It is difficult for them to run ships as good as professional shipping companies and thus tend to arouse safety and environmental risks.”

But he reserved the strongest words about the plan, in his view, of Vale’s bid to control the economic equation of iron ore transport. “Vale holds the cargo itself,” Mr Zhang said, “and intends to control shipping tonnage. It is a matter of monopoly and unfair competition which not only harms the shipping interest of mainland China, but also that of South Korea, Japan and Taiwan.”

Vale has been quiet in response to the resistance from the CSA. It was reported that in September the company had approached shipowners about possible charters of the 400,000 dwt bulkers, or even sale and leaseback arrangements.

A Vale official told Lloyd’s List earlier this week: “We are declining to make any comment regarding this project.”

REUTERS: China ports not ready to receive Vale's mega ships

Another piece in the complex puzzle that is China. Reuters has reported that China’s ports are not ready for Vale’s (now) 380,000 DWT ore carriers. Debunking this myth is the fact that the ore carrier ‘Berge Stahl’ (364,000 DWT) has called at the Chinese ore ports of Dalian, Majishan and Qingdao seven times since 2006 (from Lloyds Intelligence Network). No-one in China appears to be giving a definitive ‘No’. However, to Vale’s detriment, no one is saying ’Yes’ either.

The Antipodean Mariner

REUTERS 28th November 2011

China’s National Development and Reform Commission says China ports not ready to receive Vale's mega ships

SHANGHAI Nov 28 (Reuters) - Chinese ports are not yet ready to receive Vale's mega iron ore carriers due to a few "small issues" in handling the world's largest dry bulk vessels, an official with the National Development and Reform Commission said on Monday.

Vale, the world's largest iron ore producer, is spending billions of dollars to build an unprecedented fleet of very large ore carriers (VLOCs) to transport the steel-making ingredient to China and other major consumers.

The Brazilian mining firm has received at least three of the huge ships this year, sending them to Italy and Oman as it awaits the lifting of travel restrictions to its biggest market, China.
"Chinese ports are not entirely ready for accepting Vale's carriers due to some facilities and technical issues," said Luo Ping, head of the transportation planning division at the NDRC's Institution of Comprehensive Transportation.

Among the issues still unresolved is how the VLOCs will be safely guided into the ports.
Vale can also submit applications for each mega ship to local maritime authorities, who will then decide on whether the ports can receive them or not, Luo said on the sidelines of an industry conference.

Vale plans to operate as many as 35 VLOCs before the end of 2013, as it ramps up iron ore production to 469 million tonnes by 2015 from 308 million last year.

China, which buys around two thirds of seaborne iron ore cargoes to feed the world's largest steel industry, will add 390 million tonnes of large-scale iron ore port capacity and build an extra 440 deepwater berths by 2015, the NDRC official said.

Reporting by Ruby Lian, Writing by Randy Fabi; Editing by Miral Fahmy

Vale goes on a (Dead)weight Loss programme

Vale's 400,00 DWT ChinaMax ore carriers remain a fertile area for shipping journo's. The first Chinese-built vessel 'Vale China' was delivered from Rhongsheng on Friday 25th November, less 20,000 DWT from her Tonnage Certificate. Maybe the 'Made in China' label will open the door for her. Two stories reported today in Lloyds List;

The Antipodean Mariner

Lloyds List, Monday 28 November 2011

Vale VLOCs cut down to size (Tom Leander)

Vale China slims down by 20,000 dwt along with remaining VLOCs on order at Rongsheng Heavy Industries

NOW you see it, now you don’t.

China Rongsheng Heavy Industries announced on Friday that it had delivered the 380,000 dwt Vale China , the third very large ore carrier to be handed over to Brazil’s iron ore giant Vale, and the first to be built in a Chinese yard.

Originally, the vessel was said to have a capacity of 400,000 dwt.

What has happened to the missing 20,000 dwt? It turns out that it is still there. China Rongsheng said in a release: “The 380,000 dwt VLOC is the largest bulk carrier built by the Chinese shipbuilding industry in terms of dwt as well as the world’s largest bulk carrier with a capacity up to 400,000 dwt.”

A spokesperson for China Rongsheng’s public relations representative in Hong Kong said that the firm received instructions to change all references for the Rongsheng-built VLOCs to 380,000 dwt from 400,000 dwt. The November 25 press release on Vale China downgrades all 12 of the VLOCs to be built at Rongsheng for Vale, in a deal worth $1.6bn and inked in 2008, to 380,000 dwt from 400,000 dwt.

Underlying this juggling of deadweight tonnage is the controversy that has wracked Vale’s massive China order: will the ships be allowed to enter China’s ports? A source close to Rongsheng said that the figure of 380,000 dwt was a concession to government officials who objected to the massive 400,000 dwt number.

The change signals that Vale is willing to ship its iron ore into China’s ports in ships that are not filled to capacity.

This, of course, will cost Vale. In October, China customs data showed the country imported 12.1m tonnes of ore from Brazil at an average price of $193.10 per tonne. As a benchmark, that would suggest a 20,000-tonne drop in cargo would translate to Vale losing out on about $3.9m per shipment.

The entire order has been caught up in a political fracas that has imperilled Vale’s plan to reduce its transport costs by launching a fleet of the world’s largest dry bulk ships.

In July, the China Shipowners’ Association spoke out in protest against global miners attempting to dominate the maritime transport market for iron ore, a reference plainly aimed at Vale.
Vale has yet to receive approval to transport iron in ships of full 400,000 dwt capacity into Chinese ports. Earlier this year, the 402,347 dwt Vale Brasil was the first Vale VLOC to be delivered from South Korea’s Daewoo Shipbuilding & Marine Engineering , and vessel positioning data of its maiden voyage from Brazil to China tracked the ship making a U-turn in the southern Indian Ocean and being diverted to Italy, reportedly due to the ban.

The order for Vale China has undergone delays. The vessel was first named in July, with delivery slated for September.

One broker, reacting to the deadweight downgrade-in-name, said: “I can’t see that either the shipyard or class society would have objection to such a re-measuring if it was requested by the owner, since the only additional cost would be paperwork and presumably putting the Plimsoll line a bit further down the hull.”

He added: “Whether this will do the trick in allowing these vessels to call there is open to question.”

Vale China is the fourth VLOC to be delivered to Vale. The other three, Vale Brasil, Vale Rio de Janeiro and Vale Italia were built at DSME. Vale Brasil is about to complete its second voyage to Oman this year, Vale Rio De Janeiro has discharged its first cargo in Taranto, Italy last week and Vale Italia is expected to be received for its first loading at Ponta da Madeira on December 3, according to vessel tracking data.

Third backtrack for Brazilian miner (Liz McCarthy)

Shapeshifting is not Vale’s first U-turn

EVEN though the description of Vale’s very large ore carriers delivered from Rongsheng Heavy Industries has changed to 380,000 dwt, from 400,000 dwt, to tempt China into accepting the ships into its ports, will this marketing U-turn really work?

The Brazilian mining giant has already had to backtrack once or twice earlier this year.
In May, its former chief executive Roger Agnelli changed the name of these huge bulkers from chinamaxes to valemaxes.

In May 2011 Mr Agnelli was booted out and Murilo Ferreira took over the company; since then he has been quiet about the valemax gamble.

Ordered in July 2008, following a record peak in capesize freight rates the month before of $109 per tonne of iron ore on a Brazil to China voyage, the investment in building its own fleet was to control transport costs.It now only costs $27 per tonne to ship iron ore on capesizes on this route.

Then in June 2011, the maiden voyage of the first delivered VLOC, Vale Brasil , was rerouted when on course for China and instead discharged in Italy, a move which Vale said was “purely based on commercial demand”.

The two VLOCs in service that have completed commercial voyages have only discharged in Taranto, Italy, and Sohar, Oman.

However, Vale’s third-quarter results show that Europe only accounted for 20% of iron ore and pellet sales, the Middle East 1.4% and China a much more significant 45%.
With these huge ships hitting the water and its sales to other destinations not able to absorb them, there are plenty of theories bouncing around the marketplace about the fate of these Vale ships.

We wait with anticipation to see what happens next.

Vale’s CHINAMAX strategy founders

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.”

Daewoo, Rongsheng

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.

Rongsheng Heavy

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.”

Management Shakeup

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.

China Ports

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 jwang513@bloomberg.net; Helen Yuan in Shanghai at hyuan@bloomberg.net