Titanic bet?

Not welcome: the Vale Beijing

Companies in the resources industry know mistakes can be costly ones, as BP’s experience in the Gulf of Mexico illustrates. More often than not, the errors are unforeseen accidents and typically not of the premeditated variety.

That puts Vale’s current situation in a different category. In the Brazilian firm’s case it made a calculated business decision, but one that may also turn out to be one of its most expensive mistakes.

WiC first reported on Vale’s shipping strategy in issue 125, when news broke that its newly-launched dry bulk carrier had been turned away from Dalian and was unable to offload its cargo of iron ore. That was a serious issue given Vale’s entire push into megaships was predicated on being able to dock them in China.

Nor is this a problem of a single port rejecting the arrival of a single boat. Vale has invested $2.3 billion in 35 very large ships (also known as Valemax) to transport its ore. Theplan was simple: to better compete with Australian ore producers (shipping over a shorter distance to China, they benefit from lower transport costs) Vale would buy its own fleet. Not only that, the enormous scale of these newly designed ships would eliminate the cost advantages enjoyed by Australian miners. So Vale bet big: the combined size of its behemoths is 14 million deadweight tonnes. Together, the new arrivals – with the final vessel to be delivered by 2013 – amount to a twentieth of the world’s existing capesize fleet. Each Valemax is longer than the Eiffel Tower is tall.

Of course, ships of this size also require special port facilities. And in June the first Valemax was turned away in Dalian, ostensibly because it could not handle the new vessel. The authorities in Beijing indicated safety concerns were at work.

Then in late December, Vale’s management received some encouraging news. A Valemax owned by Singapore’s Berge Bulk but chartered back by Vale was allowed to unload its ore in Dalian. Noted the Financial Times: “It remains unclear whether the permission to dock reflects a general change of heart towards the Valemax carriers on the part of Chinese authorities or will be limited to the four vessels operated by Berge Bulk.”

The incident did at least prove the ships were capable of docking in a Chinese harbour. But while Vale continued to lobby behind the scenes, there was no sign of a wider acceptance of its vessels at other Chinese ports. And now it looks like no such approval is going to be forthcoming. Last week the Chinese authorities announced that ports would not be permitted to handle any vessel above 300,000 deadweight tonnes (Valemax are 400,000 dwt).

Reuters then quoted analysts who said that China’s move was a defensive one based on “shielding its loss-making shipping industry” from competition. With the Baltic Dry Index in the doldrums (see previous article) and some Chinese shippers already trying to renege on their contracts (see WiC120) the last thing Chinese ship bosses want to see is Vale’s massive vessels adding to the overcapacity problem.

What is more surprising – especially in retrospect – is that Vale management didn’t seek an official seal of approval from the Chinese authorities before embarking on its epic Valemax building programme.

Still, it’s not hard to see why the Brazilian bluechip thought it a bet worth making. Each of the Valemax costs about $120 million. If the ore delivered to China fetches around $140 per tonne, a single Valemax need only make three fully-laden trips between Brazil and China to pay for itself, according to industry insiders.

Ultimately analysts think some sort of compromise will be worked out, perhaps with the Brazilians offerring to sell ownership stakes in Valemax ships to Chinese firms. With the upside shared, the order might then go through to the ports to be a bit more welcoming once a Valemax drops anchor offshore.

Till then each of the ships that Vale takes delivery of will prove very costly.

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