Vale S.A. and Chinese Shipowners Square Off Over Iron Ore Trade
Vale S.A., the second largest mining company in the world, is also owner of the world’s largest sea-going ore carriers called VLOC’s, or Very Large Ore Carriers. These 362-meter (1,188 ft), 400,000 DWT ships are the longest and largest dry bulk carriers in the world, and were specifically ordered by Vale to reduce transportation costs of iron ore from Brazil to Chinese ports.
Vale’s initial plan was to order 35 of these mega-ships at an $8.1 billion dollar price tag. It was an ambitious strategy by Vale’s former CEO, Roger Agnelli to help use economy of scale to mitigate the issue of transporting ore from one side of the planet to the other. This plan has since completely backfired.
Strong and unanticipated opposition from the highly influential China Shipowners Association (CSA), who control 80% of China’s shipping capacity, has prohibited these ships from entering port. In an interview posted to their website this past July, the CSA refers to Vale’s ore shipping intentions:
Reporter: These days, Chinese iron ore import has received greater attention from the society. For a period of time, some international mining giants have been building their own fleet one after another. They have already made a vast fleet expansion plan. From what we understand, if this vast fleet expansion plan was realized, Chinese iron ore transportation would be substantially monopolized by them. Therefore, we would like to know China Shipowners’ Association’s view on this?
Association Executive: China Shipowners’ Association has noticed that some international mining giants are attempting to monopolize the seaborne transportation of iron ore sold to China by building up their own fleet with newbuilding ordering or second hand acquiring. Those mining giants have been planning a vast fleet expansion for quite some time.
Reporter: Why do these mining giants want to build up their own fleet ambitiously?
Association Executive: Their intention of developing owned fleet in great force is to monopolize or control majority of China-bound iron ore transportation. By utilizing their privileged advantage, based on their existing control over iron ore pricing, they intend to further strengthen their control of transportation, the freight rate for seaborne iron ore transport, extend their monopoly on industries and finally figure for bigger benefits.
Reporter: How will the mining giants’ monopoly over seaborne transportation impact Chinese shipping industry and steel industry?
Association Executive: China, being a big shipping country, imports enormous iron ore every year. Lots of shipping companies rely on iron ore transportation as their living basis. If those mining giants monopolized the China-bound iron ore transportation, it would severely and negatively impact the Chinese shipping community and even the world shipping industry, causing many shipping companies very likely to make loss or further go bankrupt. Meanwhile, it would also have adverse impact on the healthy development of the Chinese steel industry as well as the Chinese economy. The consequence is very serious.
As you know, controlling transportation means controlling freight rate. Those mining giants are not only profiteering but also trying to create monopoly on shipping for further exorbitant profits. What’s more important, controlling transportation also means controlling cargo delivery, which will put Chinese steel mills to a more passive position in the whole iron ore trading. Considering the role of steel industry in the country, mining giants’ formation of monopoly will leave Chinese economic development into an extremely passive position. As the representative for Chinese shipping companies, China Shipowners’ Association hereby expresses our concern and high attention. In fact, such behavior of those mining giants has also upset the international shipping industry and banking industry.
In a recent interview, Mr. Shouguo ZHANG, Vice Executive Chairman of China Shipowners’ Association comments:
We think Vale’s serial moves might cause itself heavier burdens, bigger losses and also rouse concerns and vigilance from other Asian iron ore importing countries and areas. Brazil Vale’s current task of top priority is to immediately stop its ambitious fleet expansion plan especially to cease the construction of 400,000 dwt VLOC and other types of bulkers. Only by doing so they can minimize their losses.
In August 2008, Vale contracted the Chinese shipbuilder, Rongsheng Heavy Industries (RHI), to build 12 VLOCs at a cost of $1.6 billion. In a Bloomberg report, RHI Chief Executive Officer Chen Qiang comments:
I am not worried about any possibility of Vale canceling orders,” Chen said. “They need the ships to carry iron ore, and the vessels are greener and more advanced.
In early December, a crack in a ballast tank of the Vale Beijing almost sunk the ore carrier while at the Ponta da Madeira Maritime terminal in northeastern Brazil. This issue raised concerns with Chinese authorities and further solidified their position to prohibit these ships from entering port.
With huge shipbuilding contracts still in place, Vale is now working to offer a portion of them up for contract, and come up with new commercial strategies for these vessels. In a conference call with reporters last week, Jose Carlos Martins, Vale’s head of Ferrous and Strategy, told reporters, “I don’t think the ownership of the ships is fundamental to our strategy. Under some conditions it may have sense to buy, but most of the time, it’s better to contract. The fleet, which will have the capacity to transport about 60 million metric tons of iron ore per year once fully in operation, can serve alternative ports including those in Malaysia and Oman.”
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