Lumut: Vale's Asia Contingency

Vale's iron ore logistics network continues to expand, with its iron ore and distribution centre at the port of Lumut in Malaysia due to receive its first Valemax vessel in March 2014. The facility will, like Vale's iron ore terminal at the port of Sohar in the Middle East, function as a transhipment hub for the companyin Asia. Lumut's role in Vale's iron ore supply chain has become even more vital following a decision earlier in February 2014 that Valemax ships will continue to be banned from Chinese ports.

Vale has announced that its US$1.3bn iron ore terminal at the port of Lumut will receive its first Valemax ship in March 2014. The company expects to invest a total of US$5bn (RM15bn) over the next 10 years to develop its Malaysian distribution centre, increasing its handling capacity from 60mn tonnes per year to 200mn tonnes per year. This will include the construction of an iron ore pellets plant in Lumut.

The iron ore terminal at Lumut forms part of Vale's global iron ore supply chain. The Brazilian miner's desire to expand its role in the iron ore export market has led it to develop hubs for its iron ore trade. The first was developed at the port of Oman in Sohar, with the facility offering a hub for Valemax ships to unload their iron ore from Brazil, so that it can be transhipped on smaller ships around the Middle East and North Africa.

Global Connections
Vale's Iron Ore Supply Chain

Lumut is set to play a similar role, but for the Asia region. Iron ore will be transported to Lumut in Valemaxes, and from there will be distributed to China, Japan and Taiwan, using smaller vessels. The facility will now offer Vale two supply chain options for its Valemax vessels in Asia, with Vale operating floating iron ore platforms in the Philippines.

Vale's Asia hub strategy is more vital than ever, as the ban on Valemax ships entering Chinese ports, the largest market for iron ore imports globally, remains in place. Vale managed to dock a Valemax ship into the Chinese port of Dalian in December 2011, but then a ban on ships of 400,000 deadweight tonnes (DWT), the Valemax capacity, was brought into force. This ban was further solidified with China's Transport Ministry announcing that only ships of up to 250,000DWT would be allowed to dock at Chinese ports from July 1 2014.

China remains vital to Vale with the Brazilian miner announcing that it plans to increase its total iron ore production by 50% to more than 450mn tonnes per annum by 2018; raising its market share in China is part of this strategy.

Aiming To Take A Bite Out Of Australia's Share
China- Iron Ore Imports By Country (mnt, 2013)

Currently Brazil is ranked second in terms of iron ore imports into China. In 2013 Brazil's iron ore imports into China reached 155mn tonnes; Australian iron ore however dwarfed this with 417mn tonnes of the commodity imported into China over the year.

Tackling Australia's dominance in China's iron ore import market will be tough for Vale, especially as its plan to offset Australia's prime geographic position with larger ships has not worked. Vale's Asia transhipment options will at least enable Valemaxes to get close as possible to Chinese ports, even if they are not allowed to call there, meaning the company will still be able to enjoy some freight cost savings from its Valemax fleet.

This article is tagged to:
Sector: Mining, Freight Transport, Shipping
Geography: Malaysia, Brazil, China

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