The China Wildcard, Iron Ore, and the Brazilian “Valemax” [OP/ED]
The main concern at Vale S.A., that which has driven its order of dry bulk vessels with a 400,000 ton capacity, the ‘Valemax’, is competition…
The problem is obvious – it costs a great deal more to send a “Capesize” ship from Brazil to China, by far the largest importer of iron ore, than it costs to ship from Australia, a major source for mining competitors Rio Tinto and BHP Billiton. Vale saw economy of scale per ships double the size of the cape vessels: one ‘Valemax’ equaling more than 2 Capesize ships.
Vale has some advantages in competition
Vale produces better iron ore which makes production at the steel mills more efficient, and thus cheaper. In addition, Australian miners are annually dealing with damage from rain and floods; damage that amounts to nothing less than impaired capital investment and months of delays and shut downs. Furthermore, delays at Australian ports are notoriously long and therefore, if the ship is leased at a daily rate, extremely expensive. During the 10 months running up to the crash of 2008, the Baltic Dry Index (BDI) was often over 11,000. Ships were leased at astronomical fees. Regardless of the hike in ore prices, this exacerbated the distance issue for Vale. It also made port delays into 7-figure money pits.
Vale is not alone in going vertical.
Mr. Zhang wants to save Vale from itself.
This is a little bit beyond belief. Unless I am missing something, part of the problem in the Chinese Shipowners Association (CSA) is their lack of experience in capitalism. I recall that during the negotiations on iron ore price contracts, the Chinese Iron and Steel Association (CISA) screwed up royally; a screw-up that is still costing Chinese steel mills a fortune to date.
CISA too spoke of the irrationality of the ore producers demands inasmuch as the miners did not recognize the principle that only a bargain that is fair to both sides would be the rational and most profitable way of preceding, e.g sound capitalism.
They clearly have not yet absorbed two important concepts:
1. Fairness in monopoly capitalism has nothing to do with it. There is no free market system in place. The crash, bailout and subsequent desperate straits to date in the United States should have been lesson enough.
2. All the socialists and communists from Marx to Lenin to Mao have said that capitalism is at its root IRRATIONAL, which is the main reason they claim it can’t work.
Will the Valemax fleet harm the Chinese shipowners?
My recollection is that the majority, or at least the plurality, of iron ore carriers delivering to China were not Chinese. In other words, the Valemax plan would not eat into the Chinese shipping interests’ top or bottom lines since these international iron ore shipments weren’t on their books in the first place.
I agree with the CSA on one point.
Thirty five Valemax ships are altogether too much at this time. The current glut of capacity serves to drive prices down causing a lot of pain. If Vale could get out of those contracts I dare say they would. During the boom period prior to the bust in September 2008, shipping companies couldn’t order ships fast enough. Given the leasing market, every day without more capacity was millions unearned. The average day rate for a capesize vessel in 2007 was $116,000.00; the same rates during the first 9 months of 2008 topped out at $234,000.00 per day. The Australian port delays alone would mean two or three million dollars to a dry bulk company. What they didn’t figure on was the intersection of events: the bottom fell out of the market and it takes a long time to build these vessels. In other words, by the time they’d be taking delivery the market upon which those investments were based was no more.
Many shipping companies did in fact cancel orders reasoning that losing their deposits was less onerous than taking delivery and paying 100% of the price. Given all this, I would recommend that Vale use the CSA to lobby the Chinese ship builders to happily cancel the Valemax orders and return the deposits to Vale, all for the benefit of the Chinese fleet; no harm no foul.
At that time I will know that pigs fly and there is skiing in the 9th circle of hell.
Vale has a few ways to cut their losses. Per above, they are building hubs for the transport and storage of ore for the Asian market. Thus they can utilize the Valemax vessels even when they have no specific orders. The hubs also allow for the smoother and cheaper transfer of ore to smaller vessels should the destination require them. Vale is working at leasing the Valemax fleet to other companies which is another way to recover some of its over-investment.
Finally, the Chinese government has made it clear that its goal is to have 70% of its population in urban centers as soon as possible. That means more building than would be done, perhaps, in the entirety of Europe or South America during the parallel period. In other words, sooner or later, the Valemax fleet will be extremely profitable.
The position the CSA takes in helpfully suggesting the weaknesses of the Vale business model per hubs and real big ships is as generous as it is disingenuous. It well may be true that given current market conditions the current fleet is more than adequate to serve the transport of iron ore to China and elsewhere. I’d say that this is one rationale for building shipping hubs in Malaysia and the Philippines; it is a way to cut losses. Mr. Zhang’s concern with whether or not Vale can manage the ins and outs of the shipping business is moot. The company can hire specialists in that industry. Again I say that looking at the woeful record of China COSCO and all its incarnations, Mr. Zhang might want to stick to his knitting and petition the domestic shipping business.
Which brings me back to the above mentioned event.
With all the static coming from Mr. Zhang and his Association, why is a fully loaded Valemax bulker is now unloading its 388,000 tons at a Chinese port? This leads me to believe that what the CCP would call contradictions exist among the CSA’s interests and those of the government, ship builders, ports, infrastructure contractors, and steel corporations. Whether or not Vale can manage its Valemax scheme is an issue. Regardless of what it does, I predict that Mr. Zhang will ultimately be asked to be quiet.
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