Behind the creation of a new floating transhipment terminal in the Philippines on behalf of the Brazilian mining giant Vale, is the story of emerging geopolitical tensions over China’s seemingly endless need for raw materials; between China, who believe that it is they who should carry the flows of raw materials into the world’s manufacturing heartland; and one of the world’s largest shippers, which sells said iron ore to the Chinese – and pays for its shipments.
The origins of this dispute lie in the desire by Vale to limit its exposure to the tempestuous swings in freight rates to which it was subject prior to the terrible depression into which the dry bulk shipping industry has found itself. Before the recession and subsequent crash in vessels values and charter rates, Vale found that its profit margins on the ore it was selling to Chinese steel mills were being eroded by a long-running bull market in freight rates and charter rates in the largest dry bulk vessel sizes – demand from China for iron ore was high and vessel space was in short demand, and Chinese and other shipowners made a lot of money out of transporting iron ore from Brazil to China.
In fact, such was the cost of transporting iron ore from Brazil to China at the height of the boom in 2008 that Vale almost lost its market share to Australian miners – despite the fact that the grade of ore mined in Australia is of a far lower quality – because of the differential in freight rates.
Vale then decided to enter the shipowning game itself, in what must be one of the most ambitious attempts by a cargo owner to assert its control over its supply chain with an original order of a series of very large ore carriers (VLOCs). At 362 meters long and 65 meters wide, and with a carrying capacity of 400,000 deadweight tonnage, Vale’s VLOCs represent the largest dry bulk carriers on the seas, and have subsequently been termed Valemaxes.
The initial order, placed in 2008, was for a series of 12 vessels worth $1.6 billion, or around $140 million per vessel and, at the time they were ordered, represented considerable cost savings for the Brazilian company – it was estimated that a fully laden Valemax vessel running between Brazil and China would be carrying its cargo at 28 percent cheaper per tonne than a vessel half its size.
The first in the series, the Vale Brazil was delivered in the middle of last year, and unfortunately coincided with the complete devastation of the dry bulk trades. Demand from China for iron ore has slowed markedly, but far more destructive has been the glut of newbuildings of similar size, or in the slightly smaller capsize segment that have been delivered since Vale placed its orders – and eventually it is due to operate a fleet of 35 Valemaxes.
This downturn in the market has had two effects – it has ruined the financial prospects of Chinese dry bulk shipowners, some of whom are partially state-owned and are now suffering dreadful losses, according to the latest financial results being posted on the Hong Kong and Shanghai stock exchanges; but it has also made iron ore cheaper for the Chinese steel mills to purchase.
As a side point, it is ironic that it is those self-same steel mills that provided the materials to the Chinese shipyards which continue to construct all these vessels that are causing such havoc to the market.
But crucially, there are only a few ports in China which are able to handle vessels of such sizes, and the Chinese government has yet to give its permission for the Vale vessels to dock at either Qingdao or Dalian – the two that it had earmarked to construct massive distribution facilities at.
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