At 400,000 deadweight tonnes, the Valemax is beast of a ship, offering at least twice the capacity of the average Capesize vessel.
Capesize ships themselves are too big to squeeze through the Panama Canal, and so must round the Cape of Good Hope or Cape Horn instead.
But for those with a love of facts and figures: stand a Valemax up vertically (an unlikely proposition, true enough) and it would look down on the Eiffel Tower.
Or fill it to the brim, and there is enough ore (on each trip) to make the steel for three Golden Gate Bridges.
Vale has committed to 35 new Valemax vessels by the end of 2013. The objective is straightforward, in design at least. To get its ore to China, Vale has to ship it at least three times the distance of its main competitors BHP and Rio Tinto, leaving it with a serious cost disadvantage. The Brazilian producer says that it will prove much cheaper to use its own giant ships rather than pay the prevailing spot price to smaller carriers operated by others. The forecast is for freight costs lower by as much as a quarter.
Cue a rising sense of alarm from existing ship owners, already perturbed by the glut of dry bulk capacity coming into the market (see WiC71).
The prospect seems particularly worrying for some of the leading Chinese operators on the Brazil-China route, including carriers like COSCO and Grand China Shipping. Last month Caijing magazine calculated that the full Valemax fleet making four round trips a year would account for about a 40% share of existing freight volume between the two countries.
Chinese shipping bosses have been phrasing their opposition carefully, saying that the major miners already control prices for iron ore, and now want to dominate the market for shipping it too.
Hence the suspicions that there were ulterior motives in the failure of the first Valemax to reach its China destination, in June.
The rumour is that – under pressure from the shipping lobby – the port in Dalian told Vale that it did not have enough unloading capacity, so the vessel ended up re-routing to Taranto in southern Italy instead.
Vale downplayed the situation. “There is nothing related to technical or political problems,” global director of marketing Pedro Gutemberg told Reuters at the time. “This is purely a commercial issue.”
Since then the port in Dalian has announced a terminal upgrade. Vale also told reporters in June that two other ports (Dongjiakou and Majishan) have the capacity to receive 400,000-tonne cargoes.
But there is still little sign of any of them accepting a fully loaded Valemax.
That could be the case for the foreseeable future: the secretary-general of the China Ship Owners Association has reiterated that vessels of more than 300,000 deadweight tonnes will be barred from Chinese ports for safety and environmental reasons, says Caijing.
While the stand off continues, one alternative for Vale is to switch to its Malaysian distribution centre at Teluk Rubia, bringing the ore in from Brazil before moving it onto smaller vessels for the final leg of the journey to Chinese ports.
The problem with this hub-and-spoke strategy is that it undermines the economics of the Valemax proposition. Insiders also say that Malaysia was fourth on Vale’s list as a transshipment hub, after failing to convince Qingdao, Tianjin and then Dalian to take on the role.
Vale could also try to lobby for wider Chinese support. Shipbuilder China Rongsheng has an interest, having signed a contract three years ago for delivery of 12 Valemax. So too do China Exim Bank and Bank of China, who lent Vale $1.3 billion as part of the deal.
Perhaps the Brazilians will be able to persuade a port to break ranks and sign up to a huge-volume contract, especially if dry bulk throughput slows in the months ahead.
Or Vale might whisper in the ear of the major steelmakers (not easy, given the state of relations), suggesting that some of the lower freight costs on Valemax vessels could be shared in lower prices for delivered ore.
But the other option is to find common ground with the ship owners themselves, by offering ownership in some of the vessels. As long as Vale can lock in competitive freight costs going forward, that could make sense. Spot rates also look like remaining depressed for a while, making it a little less essential for Vale to operate its own fleet.
But transferring ownership of the ships to new Chinese owners could be a negotiating nightmare, warns Tim Huxley, CEO of Wah Kwong Maritime Transport in Hong Kong, as their asset values will be well down on their new-build prices.
But if the embargo holds – and some commentators have already taken to referring to it as the Iron (Ore) Curtain – Vale bosses may be forced to come to the table.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.