Although the ‘new era’ of iron ore shipping—involving 300,000 and 400,000-ton carriers—between Brazil and China started off in rough seas, a strong application of common business sense has been like oil upon the waters
By Dave Gambrel
As described recently in E&MJ (See “China Ship Congestion—How So Many Capesize Ships Got Locked Out of China’s Ports,” p. 66, August 2012), Chinese reaction to Vale’s new, mammoth iron ore vessels was rancorous. Chinese shipowners, led by government-owned China Ocean Shipping Group Co. (COSCO), were incensed that Vale wanted to ship its iron ore product from Brazil to China in its own 400,000-ton bulk freighters (Valemaxes), and had rallied the troops to prevent the Valemaxes from discharging in China. Vale countered by refusing to load any of COSCO’s new iron ore vessels in Brazil, and by off-loading stranded Valemaxes to smaller vessels at Subic Bay, Philippines. Speaking through the China Shipowners Association, COSCO responded angrily to the Subic Bay operation. Seemingly, it would never end.
COSCO had recently invested in smaller versions of mammoth bulkers—only 300,000 tonners. Moreover, they were losing money in the cruel world of bulk shipping. Gone were the golden days of 2008 when daily rates were running $160,000-$180,000. Now the rates had dropped to $10,000-$20,000 per day, and Vale was even refusing to load their new vessels.
To the outside observer it seemed there would be no sword to cut the Gordian knot the parties were working to fashion. How would the Chinese get high-quality Vale iron ore if they would not allow Vale’s vessels into their ports? How would Vale sell its iron ore to China if they refused to load Chinese vessels tendered by COSCO? What would happen to the multi-billion dollar investment Vale had put into the new ships if China would not allow them in?
But in the midst of all the public rhetoric, a mouse began to gnaw at the knot, one so tiny and so quiet that no one seemed to notice—a mouse named silent cooperation. Quietly, Vale began loading COSCO’s fleet of 300,000-ton vessels with iron ore at its Sao Luis and Tubarao terminals, and just as quietly COSCO began hauling Brazilian iron ore to Chinese terminals in its fleet of 10 300,000-ton vessels. One might now expect the Gordian knot to quickly disappear, but it must be done with such care and deliberation that neither party would lose face. It must be done without fanfare and public announcement, without embarrassing public retractions.
Using the Automated Identification System (AIS) now required by the International Maritime Organization (IMO), we can track specific vessels across the globe. At any one time, as many as 45,000-50,000 ships can be within range of the system. COSCO owns 10 vessels in the Very Large Ore Carrier (VLOC) class—greater than 200,000 metric tons carrying capacity. Each of them has been tracked recently using AIS, and they have all followed a regular course between Brazil and China. It seems reasonable that they were all designed for the Brazilian iron ore trade, and the AIS data confirms that.
At the time this article was being written, six of COSCO’s 10 VLOCs were loaded with Vale’s Brazilian iron ore and were steaming toward iron ore terminals in China. The first of these vessels to reach port was the He Ying, which arrived in the Port of Rizhao July 17, 2012. Assuming a travel time of 44 days, the vessel must have been loaded at Vale’s Tubarao terminal between the last week in May and the first week in June—just a few weeks after the last discouraging words heard from China, suggesting the parties began to quickly see the futility of a word war, and decided to make a serious mid-course correction. As further confirmation, Reuters reported recently that China’s transport ministry in May approved plans to build berths for iron ore vessels of up to 400,000 metric tons at its eastern Ningbo-Zoushan port. This causes one to believe Beijing may eventually lift its ban on the 400,000-ton Valemax vessels.
Table 1 shows the status of COSCO’s VLOC vessels as of July 18, 2012. The typical travel time to China is 45 days, so not much in the table can change in a short period of time. Certain spaces are blank because the data were gathered after the vessel’s last transmission, or because the vessel did not give its destination, ETA or other information. Loaded vessels are indicated by gold highlighting.
While the 10 VLOC vessels were built to the same deadweight specifications, there is a big difference in their loaded drafts. The shallowest draft is possibly caused by the ruling draft at the Rizhao terminal, while the deepest draft is probably the maximum draft of the vessel type. For comparison, the maximum advertised draft of the Valemax class is 22.7 m, just 1 m deeper than that of COSCO’s New Ansteel VLOC.
A Tale of Transloading
Of the 35 Valemax vessels they have ordered, Vale currently has 11 of the 400,000-ton vessels in service. They are classified as Ultra Large Ore Carriers (ULOCs). Five loaded Valemax vessels are currently heading for its Ore Fabrica transloading facility in Subic Bay, Philippines. All were loaded to the maximum draft of 23.0-23.2 m at Vale’s Sao Luis Terminal in Ponta da Madeira, Brazil. The 280,000-metric ton Ore Fabrica, formerly a crude oil tanker, has been reconfigured to serve as a platform for unloading the Valemax vessels and transferring the ore into smaller vessels that can unload without question at Chinese iron ore terminals.
Originally opposed to the transloading operation because they considered the Valemaxes unfair competition, the Chinese have apparently gone silent because all the COSCO VLOCs are now fully employed carrying iron ore from Brazil. It is unlikely that Vale would load 2 million tons of iron ore onto five vessels unless they knew the Chinese would cooperate with the transloading operation. At $130/mt, a total cargo value of $260 million is not trivial, even to deep-pocketed Vale. In other words, Vale would not focus so much of its attention on Subic Bay if it were not confident the Chinese shipowners would retract their opposition to the operation.
Three loaded Valemax vessels are on their way to the Port of Sohar in Oman. In case you’re wondering, this is not a printing error. The planning and logistics people at Vale are so far ahead of the learning curve, the rest of us can only stand back in amazement. Before they began ordering the first of their Valemax fleet in August 2008, they realized there were only a few deepwater ports in the world where they could unload them, and they began taking steps to secure service. The Port of Sohar in Oman was one of them; the Port of Rotterdam was another.
Oman has invested $12 billion in the development of Sohar Industrial Port and is moving toward the establishment of a competitive steel cluster in Sohar. In May 2008, Vale and Sohar Industrial Port Co. signed a 50:50 joint venture agreement between the government of the Sultanate of Oman and the Port of Rotterdam to construct a production facility and distribution center for iron ore pellets in the Port of Sohar. This was Vale’s first iron ore venture outside Brazil, and its total commitment would amount to $1.356 billion.
What about the rest of the Valemax vessels? The big newsmaker of early 2012, the Vale Beijing, has been repaired by its Korean owner STX Pan Ocean, and was scheduled to arrive at Ponta da Madeira (Sao Luis), Brazil, on August 8. The Vale China reported it was heading for ‘P. Luis’. Based on its last position, this is assumed to be Port Louis, Mauritius. While this port has a deepwater anchorage, there is no evidence of deepwater dockage, so we can only guess at the purpose of this stop. The Vale Italia has unloaded iron ore at the Port of Rotterdam and is on its way back to Sao Luis. The Vale Minas Gerais was undergoing sea trials in June, and may now be on its way to one of Vale’s loading ports. The Berge Aconcagua made a June delivery of iron ore to Nippon Steel’s facility in Oita, Japan. The Berge Jaya, as well as the Vale Espirito Santo, the Vale Hebei, the Vale Sohar, the Vale Liwa, the Vale Shinas, the Vale Saham, and the Vale Neblina are scheduled for construction completion in 2012. The rest of the 35 Valemaxes on order are scheduled for delivery in 2013.
The puzzle pieces are all falling in place. For anyone that might have thought Chinese intransigence would stop the Valemax building program in its tracks, take a look at what is happening: Clearly, Vale has made plans to unload its vessels at deepwater terminals closer to Europe and Asia, and is not totally reliant on China’s ability to unload them; it was aware there are other significant deepwater terminals outside China. Nevertheless, Vale is doing everything in its power to make the system work for the Chinese. Eventually, the Chinese will have terminals that can take the Valemaxes directly, but in the meantime, the Valemax vessels will keep on sailing to minimize shipping costs for Asian and European ports that cannot accept vessels larger than Capesize or Panamax.
Coal Carrier Confusion
The iron ore fleets discussed above tend to travel the same routes. Coal-carrying bulkers frequently do not. For example, a coal vessel may depart a Chinese port, load coal at an Australian port, and deliver that coal to a Japanese port. Timing is everything in the shipping business. If it appears the vessel can make more money hauling coal to another country, that country is where it will go. It is conceivable that a shipper such as the Yuhuan Power Station might enter into a long-term charter party with a carrier, but even then the carrier would probably reserve the right to use whatever vessels it chooses as long as they meet requirements. Coal vessels can be harder to track without knowing their names.
It was reported in June that there were 30 coal vessels stranded off the China coast—ships the Chinese were refusing to unload. However, there was no evidence all 30 ships went to the same port. Even if they had, the chances of locating them would be very remote. Of all the southeast Chinese ports where they might call, the smallest (Shantou) could still show as many as 200 ships within AIS range. Shanghai could have 2,000-2,100 ships, and the Pearl River could have 2,300-2,400 ships in the 60-mile stretch between Shenzhen and Guangzhou, in which there are at least four major coal-fired power stations. Finding 30 coal vessels would have been nearly impossible, even if they were lit up at night. In addition, there are three coastal provinces (Zhejiang, Fujian, and Guangdong) and one island province (Hainan) in southeastern China, and there are at least 36 major coal-fired stations along that coast that may be fed by large coal ships. The 30 ships could have been scattered among them.
For the U.S. coal producer interested in building a terminal to serve a growing Chinese market, it might be wise to recall what happened with LAXT. Japanese banks, shipping companies, and trading houses were involved as LAXT participants, but Japanese utilities steadfastly refused to sign a long-term agreement guaranteeing they would take coal through the terminal. In the final analysis it was not environmental pressure that closed the LAXT terminal, but an inadequate flow of coal to support the terminal financially. Why would anyone think it would be better to rely on a “growing Chinese market”? Why would any Chinese utility or coal buyer sign a long-term coal import agreement when they have more than enough coal to supply their needs from their own mines? Why would anyone build an expensive U.S. coal terminal without long-term commitments to use it?
The international marketer advising his company to “get in the game” while there is still a “growing Chinese market” needs to make sure he is relying on something other than coal traders and magazine articles. He should talk to end users, and he should make sure there is a genuine long-term need for the coal at his price. Considering the Chinese penchant for coal arbitrage, one has to ask why a Chinese buyer would commit to buying U.S. coal over Indonesian or Australian coal. Considering the wild variations we have seen in daily rates for Panamax and Capesize vessels, a cheap delivered price today may become an expensive delivered price tomorrow, particularly with increasing distance. The Chinese coal buyer knows that. The U.S. coal seller should not be naïve.
Dave Gambrel is the president of Logisticon, a coal transportation consultancy. He was director of transportation for Peabody Coal Company for 15 years, and was also in charge of the company’s ocean shipping program. He was a member of the U.S. negotiating team in the formative stages of the LAXT terminal, and a member of the DTA management committee. He may be reached at email@example.com.