How Vale was vanquished

More than two-thirds of the world’s seaborne iron ore heads for China’s steel mills. The large majority comes from Australia, although Brazilian iron ore giant Vale competes with Rio Tinto, BHP and Fortescue, the leading Australian miners.

Vale’s problem is that voyages to Qingdao – China’s main iron ore port – are much shorter and cheaper from western Australia than from its home terminals in northeastern Brazil.

Ten years ago, in a bid to reduce the differentials in freight costs, it opted to establish a fleet of its own, bringing down the delivered cost of ore and capturing more of the profits from the shipping firms.

The proposal was to build a fleet of very large ore carriers or VLOCs. Also known as Valemax, they are the world’s largest dry bulk vessels with more than 400,000 deadweight tonnes of capacity. Vale put in an initial order for 14 ships and it signed long-term charter contracts with several independent shipowners who placed similar orders.

Company executives gave the majority of the business to Chinese yards, presumably hoping to win Beijing’s favour for the broader plan. Initially it looked like that might work: China’s banks offered finance for some of the VLOCs and there was talk in the press about how the fleet would bring down the cost of iron ore for the country’s steel mills.

But after only a handful of port calls the first generation of these Valemax vessels were blocked from unloading in China. Officially they were banned on safety grounds, despite protests from Vale that the megaships had docked safely in other countries. The more likely reason was that China’s bulk carriers saw the commercial dangers of allowing one of their largest customers to operate its own fleet at a time when the industry was already in dire straits.

Zhang Shouguo, vice chairman of the China Shipowners Association, was pretty explicit in saying so, claiming that Vale was “hoarding the cargo to itself and now intends to control shipping tonnage”, and the Chinese shipowners led the campaign against allowing the Valemax vessels to unload, arguing that it was a moment of national importance.

“It is a matter of monopoly and unfair competition which not only harms the shipping interests of mainland China but also those of South Korea, Japan and Taiwan,” Zhang warned.

Three years of deadlock followed in which hardly any of the Valemax were given permission to unload in China and only then in limited quantities. Vale fought back by refusing to charter vessels from the Chinese majors and trying to enlist the support of China’s steelmakers by offering them a share of the savings.

In the meantime the Brazilian miner was forced to move its iron ore cargo onto smaller vessels at transshipment points in the Philippines and Malaysia before shipping it onwards to China, which undermined the economics of the original plan.

Falls in global freight rates further eroded the commercial justification for owning such a troublesome fleet and Vale showed the first signs of surrender at the end of 2013 when it sold four of the VLOCs to privately owned Shandong Shipping.

A few months later there was a fuller capitulation when 12 more of the ships were sold to China VLOC, China Ore Shipping and ICBC Leasing. All of the ships were chartered back to Vale on long-term contracts.

The press was full of predictions that the blockade would soon be lifted and sure enough, the Ministry of Transport issued notices approving the berthing of Valemax vessels at four of China’s ports.

The embargo was over and the first full cargo of iron ore from Brazil was unloaded at Qingdao.


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