Iron ore unloaded at the port of Qingdao. (Photo/Xinhua)
Brazilian mining company Vale has found itself in a tricky situation as the company will see no return on its vast investment in its own fleet of cargo ships in the near term. With its very large ore carriers still banned from docking at Chinese ports, the company is adopting a diplomatic attitude in the hope that it will receive clearance soon.
In response to escalating shipping costs, Vale has devoted vast sums of money to build its own fleet of 35 massive Valemax carriers, a measure also intended to gain a shipping advantage over Australia-based competitors such as Rio Tinto and BHP Billiton which hold a proximity advantage when shipping to China.
Vale has said that the company should bear responsibility for the ban on its largest freighters entering Chinese ports as it did not provide information to the Chinese government and enterprises in advance about its strategy in the area. The company plans to use every opportunity to lobby the government to lift the ban and clear any misunderstandings. It also emphasized that the company will abide by China's laws and regulations.
Valemax vessels are the world's largest iron ore vessels with a capacity of 400,000 deadweight tonnes each. The company claims that they can reduce shipping costs to China by 25%-30% compared with the 200,000-tonne Capesize ships. The shipping price per tonne of iron ore from Australia was US$8.90 in October, compared to US$22 from Brazil, highlighting the significance of shipping costs in the final price.
Accounting for 45% of the world's iron and steel output in 2011, China imported 60% of the world's iron ore production. As of August 2012, Vale accounted for 19.8% share in the China iron ore market.
With no resolution in sight in the near term, Vale has already planned to sell 16 of the 35 vessels to other shipping companies or rent them if needed. The company has sold another 10 large vessels to ease its near-term financial pressure. Domestic logistic centers and shipping terminals have also been established in the meantime to save shipping and logistics cost.
A cooling off of investment incentives in China's real estate and infrastructure sectors has put the iron and steel industry into a trough. As of August, the volume of iron and steel produced by China only grew by 2.5% year on year. The situation worsened as iron ore supply from competitors such as Australia and Brazil grew at the same time.
The result has been a price plummet in the iron ore market. As of mid-September, the price per tonne of iron ore has slashed to US$100 from US$180. As oversupply looks set to persist in the coming years, Vale estimates that the price per tonne of iron ore will stay at US$100-$120 in the next six months.
Stimulus plans for infrastructure projects launched by Beijing in August are expected to bring a short-term positive impact to the iron and steel industry in the first half of 2013, leading to a rebound in the price of iron ore. Yet the growth rate should be limited in light of the long-term picture. Strict tax regulations for mining industries worldwide also make cost reduction harder.