Valemax Strategy Further Imperilled

BMI View: We expect further complications for Vale 's strategy of increasing its Chinese iron ore market share after China's Transport Ministry reaffirmed a long-standing ban on Valemax ships berthing at Chinese ports. After ordering a review of the policy in August 2013, the Ministry recently announced that only ships up to 250,000 deadweight tons (DWT) could berth at Chinese ports from July 1st, effectively preventing Vale's class of over 30 very large ore carriers (VLOCs) from shipping directly to China. We still expect China to be the top destination for Vale's iron ore, but believe the firm could lose market share to its Australian rivals due to cost competitiveness.

We believe the recent decision by China's Ministry of Transport to ban ships greater than 250,000DWT from docking in Chinese ports is likely to lead to Vale experiencing difficulties in expanding its market share in China and increases the risk it loses out to Australian rivals. The decision effectively solidifies China's ban on the 400,000DWT Valemax fleet, a major blow to Vale which primarily built the fleet to increase iron ore export volumes from Brazil to China, and to do so at a lower per-unit cost. The decision stems from objections by both Chinese steelmakers and shipping companies, who feared allowing the Valemax ships into China would give the Brazilian firm monopolistic control over iron ore supplies, and hence prices. By banning the Valemax fleet from entering Chinese waters, Vale will be unable to extract the cost savings it sought to increase its competitiveness with Australian rivals BHP Billiton (BHP), Rio Tinto (Rio), and Fortescue Metals. Rather, iron ore shipped to China will either need to be loaded onto smaller vessels in Brazil or transhipped through ports in the Philippines or Malaysia. Thus, even with current global shipping costs subdued, Vale still faces the spectre of higher transport costs at a time when iron ore prices are trending lower with the economic slowdown in China.

Going The Distance

Australian Domination To Continue
China - Iron Ore Imports By Country (mnt, 2013)

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

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