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Articles Steel Industry Insight

A tale of two countries

It wasn’t all that long ago that Brazilian mining company Vale S.A. decided to enter the global shipping market. The move made sense; instead of hiring global shipping companies to transport iron ore from Brazil to Chinese steel mills, Vale would construct its own fleet.

Up until then, the most commonly utilized iron ore carriers, Capesize ships, capped out at an approximate capacity of 180,000 tons. Contracting them was not cheap; the average transport time from Brazil to China is about 45 days and the cost to get shipments from point A to point B came at a cost of just over $100,000 per day. Then came 2007: the year Vale’s ship chartering costs increased by nearly 80 percent. It was time for a change, and the Valemax ships were conceptualized to be a world-wide game changer.

Valemax ships were conceptualized to be a world-wide game changer.

Vale’s plan involved the construction of 35 ships that would have the capacity to carry up to 400,000 tons of iron ore per trip, well surpassing the previous record holder, the Berge Stahl, which was rated at 364,000 tons.  From a mental imaging perspective, these ships would be nearly four times the length of a football field. They would be big, lean, iron ore transporting machines.

One Valemax shipment, they said, would be able to carry more than twice the capacity of a single Capesize vessel. Vale officials believed that by constructing and implementing the Valemax fleet into service, they would cut transport costs by 20 percent. China raised an eyebrow at first, but seemed to come on board not long after the announcement. This may have been due to a 12-ship, $1.6 billion contract having been awarded to Chinese shipbuilder Jiangsu Rogsheng Heavy Industrises (JRHI)—the single largest shipbuilding contract of its kind.

An additional 16 vessels would be built in South Korea and China for other shipping companies but would be contracted to Vale for long-term use. The final seven were ordered from South Korea’s Daewoo Shipbuilding and Marine Engineering.

The first vessel was delivered to Vale in November 2011. JRHI affirmed the balance of what they were working on would be delivered by the close of 2012. In December 2011, the Berge Everest mega-ship docked in the port of Dalian and unloaded approximately 350,000 tons of iron ore in less than 55 hours—a feat which made international headlines. Chinese steel industry executives were thrilled, with one industry association leader citing a belief that this would help lower production costs.

But while world economists were busy chattering about how the Valemax ships were making history, Chinese shipping companies were more focused on their bottom lines. On January 31, 2012, the Chinese Ministry of Transport (MOT) announced that ships exceeding the approved capacity of 300,000 tons would no longer be permitted to dock in China’s ports. The mandate was immediate.

While world economists were busy chattering about how the Valemax ships were making history, Chinese shipping companies were more focused on their bottom lines.

Vale officials balked, and global exporters of coal and oil followed suit. It wasn’t until two days later, when the MOT released a clarification that only dry bulk ships carrying more than 350,000 tons would be banned, that sighs of relief began to emerge. Vale, though, was still firmly situated between a rock and a hard place—it was hardly a coincidence that the only vessels of that size were being used to transport their iron ore.

The official stance offered by the MOT was “safety concerns,” although many believed it was just an excuse to squeeze Vale out of the shipping business. Even though the rumors have not been confirmed or denied, the general consensus is that the decision to ban Valemax ships from docking in China came after the Chinese Shipowners Association and state-owned China Ocean Shipping Group Company (COSCO) threw a big, raging tantrum. Of course, COSCO spokesperson Guo Huawei denied his company made any attempts to influence the MOT.

Vale immediately began making other arrangements, including re-routing Valemax ships to the Philippines. Industry insiders have said they are negotiating other projects in Japan and South Korea, and are on track to open a hub in Malaysia next year.

Brazilian iron ore hasn’t been banned from entering the country, they noted, which is why Vale moved to secure ground transport into China via other means. Ship-to-ship transfers, in which transfer vessels with cranes grab and discharge iron ore into smaller ships, have also been utilized.

Everything seemed to be running as smoothly as could be expected, although more animosity reared its head in the months to come. In April 2012, Chinese shipbuilder JRHI reported that Vale had refused to take delivery of the final two Valemax vessels. One month later, COSCO executives were dumbfounded when they learned that Vale moved to stop using the company’s ships to transport their product.

Vale has refuted accusations that they have taken retaliatory measures, pointing out that executives traveled to Beijing shortly thereafter in hopes of clearing the air. COSCO secretary general Zhang Shougo confirmed the company’s willingness to partner with Chinese shippers to discuss transport.

Still, the MOT’s decision caused the Brazilian miner to take a substantial financial hit. At the close of 2012, Vale reported a $2 to $3 per ton loss from shipping costs related to alternative methods needed to transport iron ore from Valemax ships into China.

At the close of 2012, Vale reported a $2 to $3 per ton loss from shipping costs related to alternative methods needed to transport iron ore from Valemax ships into China.

Pressure from the steel industry

Steel mills in countries throughout Southeast Asia began to face higher raw materials costs toward the end of 2011. And once the price of iron ore begins to climb, prices for finished steel products soon follow. Countries such as Korea, Taiwan and Vietnam have attempted to pass on those increases to American buyers, but the US domestic market has not been robust enough for those increases to be absorbed.

Chinese steel companies  also seemed to feel the pinch. On January 31, 2013, the Chinese Steel Association sent out a notice indicating their full support of Valemax ships being allowed to dock in Chinese ports. A decrease in iron ore costs could have a positive impact on profit margins, they said, and allowing Vale to directly unload from their megaships makes financial sense. In the end, bringing down the cost of iron ore would allow Chinese mills to reap the benefits of higher profit margins.

Additionally, Vale’s Executive Officer for Ferrous Minerals and Marketing, Jose Carlos Martins, was quoted in a Brazilian newswire saying Valemax ships will be able to return to China later this year. The MOT, though, is remaining tight-lipped and has yet to indicate whether they are considering a reversal of the ban.

When and if a reversal will be announced has yet to be determined, and whether political pressure from neighboring countries has played any part in a recantation is not yet known. Resistance to a shift in the status quo is often immediate, and the idea that the Valemax ships have a lifespan of 25-35 years may be a hard pill for China to swallow. But like it or not, the vessels are here to stay. The question is whether Chinese shippers will adapt and change, whether they will fight tooth and nail to keep things the same.

And if so, whether they will be left behind as the rest of the world flows toward advancement.


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