Tuesday, November 29, 2011

China Locks Out Vale!

Wow! What a Thanksgiving Weekend! Buried amongst sales projections and traffic delay stories, a bomb exploded on the international iron ore market. It went virtually unnoticed and under reported, yet, has far reaching influence on the future of the iron ore industry.

China has blocked Vale's 400,000 dead weight ton Very Large Ore Carriers from entering Chinese waters!

China is refusing to accept the ships into the country, as pressure from China's ship-owners - citing existing pressure on bulk carrier rates and a slew of new tonnage set to enter the market; and China's steelmakers who reportedly contend that the ships will conspire to give Vale more control over pricing and delivery.

  • "Nobody in China wants Vale S.A.'s fleet to come," Chang Tao, an analyst from China Merchants Securities Co. told Bloomberg. "Not shipping lines, not ship owners, not steelmakers."
  • "Once Vale S.A. moves its own iron ore, its control on the supply of iron ore extends into shipping, further diminishing Chinese steelmakers' bargaining power," Huang Wenlong, an analyst with BOC International Holdings Ltd., said. "That is a situation China doesn't want to see."
  • "The most important thing for Vale is to stop building (ships)," Zhang Shouguo, Executive Vice Chairman of the China Shipowners Association , said. "The additional capacity will exacerbate the already bad freight market."
As regular readers may recall, I announced the launch of the "Vale (pronounced "valley") Brasil" back in May of this year. Indeed, Vale's web site proudly announced the commissioning of the largest bulk carrier in the world, with a superbly produced music video, sung by the world renown singer Charles Aznavour (1974-2009.)

The very large ore carriers (VLOC) each are designed to carry 400,000 metric tons, and the shipbuilding order was touted as part of the firm's plan to maximize efficiency if its operations in the iron ore market, a strategy including using longer freight trains with 330 wagons and more efficient locomotives.

Vale bought its vessels from China's Rongsheng Heavy Industries Group Holdings Ltd. And South Korea's Daewoo Shipbuilding & Marine Engineering Company. Agreements to lease eight from STX Pan Ocean Company, under a $5.8 billion 25-year deal were also contained in a 2009 statement from the Seoul-based shipping line. As well a s a deal to operate four 400k vessels for the Sultanate of Oman.

The development of this project represented was touted by Vale as a huge technological challenge in terms of innovation. The vessels allow high-speed loading, unloading, suitable for most modern ports in the world, and have an efficient ballast system, capable of pumping out standing water with six bilges in each hold.

They also reduce carbon emissions by 35% per ton of ore transported - a "green" project that received in May the "Nor-Shipping Clean Ship Award", an international industry acknowledgment for this achievement.

Following a string of celebrations, the Vale Brasil was sent to Ponta da Madeira, and loaded with 390,000 metric tons of iron ore, departing for Dalian China on May 25th. Bu a radio message abruptly terminated the maiden voyage of the Vale Brasil off Durban, South Africa.

GPS tracking shows the vessel loitered off Durban for two days, while apparently radio transmissions darted back and forth. Finally, she reversed her course, heading south around Cape Agulhas, journeyed up the west coast of African, entering the Mediterranean Ocean and finally landing in Taranto, Italy.

So far, Vale has taken deliver of four behemoths,
  • Vale Brasil - IMO 9488918
  • Vale China - IMO 9522972
  • Vale Italia - IMO 9572331
  • Vale Rio de Janeiro - IMO 9572329

From my armchair viewpoint, Vale's business model for investing in these vessels made good business sense. By eliminating third party shipping companies, Vale would be able to control and fine tune every direct and indirect cost incurred in shipping iron ore from the Carajas Brasil Complex.

This is especially important when you realize Vale has a disadvantageous distance reaching China, as compared to the nearest competition, Rio Tinto and BHP Billiton.

Vale owns the mines, the EFC Railroad, PDM Terminal. Now, with the final piece in place, owning the ships that haul the ore - 45% of which goes to China - the model is complete. And this has upset the Chinese Iron Ore producers.

Vale has invested million of dollars in building a new 400,000 dead weight ton Pier IV at PDM,

and investing millions more on upgrading infrastructure, including the Carajas rail line, and material handling capacity, as demonstrated by this remote control room, operating stacker/reclaimers in air conditioned comfort, miles from the terminal.

It is not clear what the disposition of the Vale Italia and Vale China will be, both scheduled to arrive at PDM in December.

Obviously this is a developing story, but already the saber rattling has been raucous.

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