Friday, 09 Dec 2011
FE reported that Vale SA’s scare as one of its new gigantic iron ore ships cracked two ballast tanks is a mere sideshow to the bigger battle between the world’s largest producer of the ore and China, the biggest buyer. At stake is who gets to hold the whip hand in the 1 billion tonne a year seaborne iron ore market, and neither side is going to want to blink first.
Neither the Brazilian company or the Chinese may have to give in first, as there are reasons to think that a compromise may be the best way to resolve the dispute.
The heart of the problem lies in Vale’s plan to build 35 mega-bulk carriers with a capacity of around 4,00,000 tonne each, or about double the average size of existing Capesize vessels that haul the world’s iron ore.
Vale’s reasoning is simple enough, it will allow them to cut freight costs and better compete with BHP Billiton and Rio Tinto, whose mines in Western Australia are substantially closer to China than those in Brazil, whose ore has to cross two oceans and go around the Cape of Good Hope. Using the massive vessels, six of which are already sailing will reduce freight costs and could cut the USD 14 per tonne freight charge from Brazil to China in half.
If Vale owns the ships, it will get the saving, and USD 7 a tonne on the around 140 million tonne a year Vale sells to China represents a gain of as much as USD 980 million. The entry of the ultra-large ore carriers will also depress freight rates for Capesize vessels, meaning Vale will also benefit from lower charges on the 180 million tonne of output that it sells to customers other than China. And it’s here where the Chinese objections to Vale’s shipping plans come to the fore.
China’s state owned Cosco Group will suffer if Vale’s giant vessels depress freight rates further. COSCO will also lose volumes to the Vale ships, so it’s a double whammy. And Chinese steelmarkers fear that if Vale controls both the mines and the ships it will lessen their ability to bargain for better prices.
The steelmakers also worry they won’t share in the benefit of falling freight rates, with the extra cash accruing to the miners, who have already gained from changing to short-term contracts . So it comes as no surprise that Vale’s ships have so far been blocked from docking at Chinese ports, on the grounds that facilities aren’t yet ready for them and questions as to how they would be guided to the docks.
But it may also be that the Chinese are upping the ante with Vale, effectively saying that they aren’t going to allow the ships in until the Brazilian company makes some concessions.
These could include leasing out or selling the massive ore carriers, or agreeing to some price reductions to steelmakers so the benefits of cheaper freight costs are shared.
Vale maintains it doesn’t want the new vessels in order to make money from the volatile shipping business, rather it wants to improve its own competitiveness against the Australians. That may well be the case, but then Vale should be willing to compromise in order to lock in some profits.
The longer the matter remains unresolved, the more likely it becomes that the winners will be BHP and Rio. China’s imports of iron ore rose 10.9% in the year to October over the same period last year, with Brazil’s share gaining 13.3% while Australia’s rose by 9.2%.
(Sourced from FE)
FE reported that Vale SA’s scare as one of its new gigantic iron ore ships cracked two ballast tanks is a mere sideshow to the bigger battle between the world’s largest producer of the ore and China, the biggest buyer. At stake is who gets to hold the whip hand in the 1 billion tonne a year seaborne iron ore market, and neither side is going to want to blink first.
Neither the Brazilian company or the Chinese may have to give in first, as there are reasons to think that a compromise may be the best way to resolve the dispute.
The heart of the problem lies in Vale’s plan to build 35 mega-bulk carriers with a capacity of around 4,00,000 tonne each, or about double the average size of existing Capesize vessels that haul the world’s iron ore.
Vale’s reasoning is simple enough, it will allow them to cut freight costs and better compete with BHP Billiton and Rio Tinto, whose mines in Western Australia are substantially closer to China than those in Brazil, whose ore has to cross two oceans and go around the Cape of Good Hope. Using the massive vessels, six of which are already sailing will reduce freight costs and could cut the USD 14 per tonne freight charge from Brazil to China in half.
If Vale owns the ships, it will get the saving, and USD 7 a tonne on the around 140 million tonne a year Vale sells to China represents a gain of as much as USD 980 million. The entry of the ultra-large ore carriers will also depress freight rates for Capesize vessels, meaning Vale will also benefit from lower charges on the 180 million tonne of output that it sells to customers other than China. And it’s here where the Chinese objections to Vale’s shipping plans come to the fore.
China’s state owned Cosco Group will suffer if Vale’s giant vessels depress freight rates further. COSCO will also lose volumes to the Vale ships, so it’s a double whammy. And Chinese steelmarkers fear that if Vale controls both the mines and the ships it will lessen their ability to bargain for better prices.
The steelmakers also worry they won’t share in the benefit of falling freight rates, with the extra cash accruing to the miners, who have already gained from changing to short-term contracts . So it comes as no surprise that Vale’s ships have so far been blocked from docking at Chinese ports, on the grounds that facilities aren’t yet ready for them and questions as to how they would be guided to the docks.
But it may also be that the Chinese are upping the ante with Vale, effectively saying that they aren’t going to allow the ships in until the Brazilian company makes some concessions.
These could include leasing out or selling the massive ore carriers, or agreeing to some price reductions to steelmakers so the benefits of cheaper freight costs are shared.
Vale maintains it doesn’t want the new vessels in order to make money from the volatile shipping business, rather it wants to improve its own competitiveness against the Australians. That may well be the case, but then Vale should be willing to compromise in order to lock in some profits.
The longer the matter remains unresolved, the more likely it becomes that the winners will be BHP and Rio. China’s imports of iron ore rose 10.9% in the year to October over the same period last year, with Brazil’s share gaining 13.3% while Australia’s rose by 9.2%.
(Sourced from FE)
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