By David Gambel
There was a great deal of excitement the first week in June when it was reported that more than 30 Panamax and Capesize ships were floating off the coast of China with unsold cargoes.
For the coal and ore brokers and others that had not been paid, it was panic time. There would be sleepless nights and lunchless days as they tried to sell their cargoes to the Chinese, Koreans, Indians, Italians, or anyone else that would take them. It is unclear whether this was a case of southeastern Chinese utilities arbitraging imports with domestic production from northern China, if it was a symptom of the continuing battle between Chinese shipowners and Vale, or some of each. Coal was important, but iron ore shipping was wagging the dog.
The only thing brokers had in their favor, if one can call it that, was that daily hires for Capesize ships were running at record lows, low enough that some shipping companies (Mitsui OSK) were already putting some ships in lay-up. Compared to iron ore cargoes that were worth $20 million, daily ship hire was relatively small. The real problem was that they could not reload ships with more expensive cargoes unless they were unloaded first. They knew a loaded ship would take 45 days to make the trip from Brazil to China, so every single ship was limited in its annual capacity.
At the same time there was also a lockout of iron ore ships taking place. The lockout grew out of a Vale order for new mega-ships to carry Brazilian iron ore to China, an order which was intended to help Vale compete with Australian iron ore producers BHP and Rio Tinto. The ship-chartering people at Vale were already chafing with Capesize daily rates that were running more than $100,000/day, but when they jumped to $180,000 in late 2007, it was time to do something about controlling rates. It was time to place their first order for the first 12 Valemax ships.
The first Valemax vessels were ordered August 3, 2008, when Vale signed a contract with Chinese shipbuilder Jiangsu Rongsheng Heavy Industries (RSHI) for the construction of 12 400,000-metric ton (mt) ore carriers. The contract, worth $1.6 billion, was the world’s largest single shipbuilding contract by deadweight tonnage. They would be the largest dry-bulk cargo vessels ever built—366-m long by 66-m wide.
Only three Chinese ports—Dalian, Dongjiakou and Majishan—are capable of handling the mega-ships. One can only assume Vale had the approval of Chinese officials before ordering 36 vessels at $150 million each. The 380,000-mt Berge Everest delivered a load to Dalian in December 2011, the only time one of the vessels has taken cargo to a Chinese port.
Vale rolled out the Vale Brazil, the world’s largest dry-bulk vessel, a ship designed to reduce the cost of shipping iron ore—the main steel ingredient to China, the company’s largest market. On its maiden voyage however, the China-bound vessel was diverted to Italy for commercial reasons and to allow time to finalize talks for future port deals, Vale said. Vale will have China and South Korea build 18 new giant bulk carriers because domestic Brazilian shipyards do not have capacity to take the order.
No one can accuse Vale of acting maliciously toward Chinese ship builders because the $1.6 billion contract would employ thousands of Chinese workers. In fact, most shipowners were so thrilled with the high daily rates they began ordering ships of the super Capesize class. Their attitude would change with time, especially those involved in the Brazilian iron ore trade.
Similarly, no one can accuse Vale of acting maliciously toward Chinese ship owners. How was Vale to know The China Shipowner’s Association’s (CSA) two largest ship owners, COSCO and HOSCO, ordered new ships of a slightly smaller size (approximately 300,000 mt)? How were they to know that COSCO alone would, from 2009-2011, take delivery of 17 of the very large Capesize vessels, 10 of which were in the 300,000 mt class? HOSCO took five ships in the 300,000 mt class. These 22 ships alone would increase available tonnage by more than 5 million mt, but other ship owning companies were jumping on the band wagon and ordering new ships. After all, who wouldn’t want more of the $180,000 daily rates? All of the new ships produced a glut of capacity that drove daily rates down precipitously.
There was an immediate reaction to the first Valemax vessel to appear for unloading: it was rejected. Imagine that. What would normally be expected as a celebratory occasion was instead turned into a marine disaster. After taking delivery of two more of the Valemax vessels, Vale cancelled its orders for more vessels. It would be difficult to deny that CSA’s public statement was influenced by their most powerful member, COSCO. Yet when Vale refused to use any COSCO ships for iron ore loading, COSCO acted like they did not understand.
COSCO, the largest shipowner and arguably the most influential member of the CSA, was already feeling the pinch of record-low daily charter rates, and was looking for a way to avoid the threat of losing Brazilian iron ore business to Vale’s new mega-ships. CSA issued a statement and put it on their website (See page 67).
The CSA was enormously influential in the formation and execution of Chinese maritime policy, and were anxious to do whatever was necessary to help the cause of Chinese shipowners. Iron ore vessels loaded from Valemax ships in Subic Bay found it difficult if not impossible to get port entry permits in China. When COSCO reported widening losses in its first quarter 2012 financial report, Chinese sympathy for their cause increased.
Having only three ports capable of handling the monstrous Valemaxes, which require 23-m water depth, one can understand why the Chinese would be concerned about ship safety. While the timing of it seems suspect, one of the first Valemax ships had an accident in the loading port that would call into question the safety of the Valemax vessels. The Vale Beijing sprung a leak while loading, and had to be towed away from the loading dock. It could have disrupted the daily loading of a huge amount of iron ore had it sunk at the dock.
After the incident, the CSA questioned the safety of the 400,000-mt ore carriers commissioned by Vale. CSA was particularly concerned about the ability of the newly built ships to withstand various sea conditions and the pollution resulting from fuel oil leaks in case of structural damage—each Valemax ship can carry around 10,000 mt of fuel oil. In January 2012, China officially banned the vessels from Chinese ports.
The Vale Beijing incident delayed the loading of only 750,000 mt of iron ore. However, it could have been worse. On November 11, 1994, Trade Daring, a 145,000-dwt ore-bulk-oil carrier, broke in two at the same location due to incorrect loading. It blocked the deep water pier of Ponta da Madeira for more than six weeks before the wreck was removed and scuttled offshore. It could happen in China with these huge vessels, CSA reasoned.
On July 5, 2011, China Transport Construction Group completed work to expand Dalian’s port capacity, making it possible for ships as big as Vale’s giant bulk carriers to access a key port in top iron ore importer, China. “[China Transport Construction Group] recently completed an upgrading project to expand Dalian’s port capacity to 400,000 mt from 300,000 mt,” China’s state-owned Assets Supervision and Administration Commission of the State Council said in a statement dated July 1. “This is the second port in China that can handle 400,000 mt class ore dry bulk carriers.”
This issue between Vale and certain Chinese interests began over iron deliveries from Brazil to China. The question is, “How are foreign coal producers affected, if at all?” The answer, quite simply, is the vessels they use. If a vessel owner has a supply of Capesize vessels he can place in iron ore service for $10,000/day or coal service for $25,000/day, where is he going to place those vessels? The vessels are equally usable in either service, or for that matter, for hauling grain. Without a detailed analysis we do not know how many coal vessels are caught up in the current iron ore flap.
The parties have much to learn. For Vale, the lesson should be to avoid ordering large numbers of vessels before receiving systems are proven. For COSCO, the lesson should be that Vale cannot possibly be responsible for plummeting daily rates in the years following record daily rates, and should not be blamed for all the ills that have befallen COSCO since the Chinese started buying Brazilian iron ore.
Both companies are guilty of jumping on the ship-ordering band wagon when daily rates were at or approaching an all-time high. They are equally culpable in creating the glut of Capesize tonnage that now operates to drive rates to unbearable lows. Showing the best of intentions, Vale still cannot do anything right in the eyes of CSA and COSCO. They spent millions to build the Subic Bay transshipment facility, but were openly criticized by CSA for doing so. If they do everything CSA wants them to do, will they then be acceptable? On the other hand, if they do everything CSA wants them to, will CSA then be managing Vale? Perhaps it is time for the Dalian Arbitration Court to crank up.
When the coal exporters of the world discovered in 2009 that the Chinese were suddenly importing more coal than the base level of metallurgical coal they had been buying from Australia, they were pleasantly shocked. Now many are acting like they think it will last forever, trying to build terminals on the U.S. West Coast. The Chinese don’t need coal—they are swimming in it. In 2009 alone, they produced 2.9 billion mt from a reserve that is 180 billion mt or more.
So why did they start buying import coals? They recognized they could buy Australian and Indonesian steam coals cheaper at the port of need (e.g., Guangzhou, southeastern China) than they could buy Chinese produced coals, which were produced in northwestern China provinces and transported from northeastern Chinese ports. Because inland transportation is usually inadequate and too expensive, most China-produced coal is railed to the coast, loaded on 40,000-50,000 dwt vessels, and shipped to the industrialized south to compete with imported coals. Quite simply, the Chinese are arbitraging their own cabotaged coals with imported coals.
Export terminals used for China-produced coals include Qinhuangdao, Huanghua, Rizhao, Tianjin, Qingdao, Lianyungang and Caofeidian. If a coal seller sees a report of port congestion at these ports, chances are very good his vessel will not be involved. Usually, these will be the smaller vessels waiting to be loaded with Chinese coals.
Import terminals used for arbitrage include Guangdong, Zhejiang, Shanghai, Ningbo, Xiamen, Guangzhou, Shantou and Beihai ports. If a coal seller sees a report of port congestion at these ports, chances are good his vessel could be involved, so he may need to investigate further. These will usually be Panamax and Capesize vessels waiting to unload.
Dave Gambrel is a coal transportation consultant and writer. He is the former director of transportation for Peabody Energy, and was in charge of its chartering program. He may be reached at [email protected].
China Shipowner’s Association’s Comment and View on Vale’s Construction of Transshipment Hub and Distribution Center in Philippines and Malaysia to Transport Iron Ore Imported by China, 2011-12-06
Background: In September, Vale and Philippine Subic Bay Metropolitan Authority (SBMA) signed a memorandum of agreement to build an iron ore transshipment hub in Subic Bay. By using a purposely-designed floating terminal to be located in Subic Bay, Vale can carry out an iron ore transshipment operation from its Valemax mother vessel to smaller daughter vessels or feeders with main destinations being mainland China, South Korea, Japan and Taiwan. Vale is also exploring the feasibility of constructing an iron ore offshore storage facility.
What impact will Vale’s serial moves have on the iron ore shipping market? Reporters therefore sought opinions from Mr. Shouguo Zhang, vice executive chairman of China Shipowner’s Association.
Reporter: It is reported that Vale has been engaged in constructing transshipment hub and distribution center in Philippines and Malaysia to transport iron ore imported by China. What’s China Shipowner’s Association’s view on that?
Mr. Shouguo Zhang: First of all, Vale bases its moves of constructing transshipment hub and distribution center on its owned fleet but aims at the iron ore which is imported by China. This violates the principle of optimizing resource deployment. At present, the existing fleet in the market is completely able to satisfy the iron ore shipping demand. There is no necessity to waste resource to construct transshipment hub and distribution center. The additional transshipment step only leads to the waste of resource and decrease of efficiency. Second, Vale is an iron ore producing corporation that obviously lacks experience in ship safety management, ship pollution prevention, and ship operation and management. It is difficult for them to run ships as good as professional shipping companies and thus tend to arouse safety and environment risks. Third, Vale holds the cargo to itself and now intends to control shipping tonnage. It is a matter of monopoly and unfair competition which not only harms the shipping interest of mainland China but also that of South Korea, Japan and Taiwan area. Fourth, the current shipping market is in its downturn. Wherever Vale builds the distribution center, its cost will not be lowered. Their gains cannot make up for their losses.
We think Vale’s serial moves might cause itself heavier burdens, bigger losses and also concerns and vigilance from other Asian iron ore importing countries and areas. Brazil Vale’s current task of top priority is to immediately stop its ambitious fleet expansion plan especially to cease the construction of 400,000 dwt VLOC and other types of bulkers. Only by doing so they can minimize their losses.”