Fears supersized carriers may corner market
When two shipyards in South Korea and China held naming ceremonies earlier this year for two 400,000 deadweight tonne iron ore carriers, they signalled a shift in the dynamics of the global ore transportation market.
The two ships - Vale Brazil and Vale China - are among 19 sister vessels ordered by the Brazilian commodities company Vale, at a total cost of US$2.35 billion from Daewoo Shipbuilding and Marine Engineering and China Rongsheng Heavy Industries.
Vale has also signalled its intention to charter a further 16 supersized ore carriers from other owners. These are more than twice the size of conventional Capesize dry cargo ships of around 180,000 dwt.
But Vale's move has caused consternation among the shipping industry. The China Shipowners' Association recently warned of dire consequences for mainland shipowners and the country's steel industry if mining firms own ships.
Zhang Shouguo, executive vice-president and secretary general of the association said that by owning ships, Vale and other mining companies intended to monopolise or control the majority of China-bound iron ore shipments because they would get to control freight rates along with iron ore prices.
'If those mining giants monopolised China-bound iron ore transportation, it would severely impact the Chinese shipping community. It would also have an adverse impact on the development of the Chinese steel industry as well as the Chinese economy. The consequence would be very serious,' Zhang said. This could plunge shipping companies into the red.
Zhang said if Vale and other mining companies owned ships, if would mean less business for mainland, Hong Kong and other owners of large dry bulk ships. Fewer ships would be chartered because fewer cargoes would be transported by independent owners. This would depress freight rates at a time shipowners are already reeling from a slump in charter rates because so many new Capesize vessels have been delivered.
Fewer cargoes would also reduce the number of cargo fixtures handled by shipbrokers, which could cut their earnings.
'It is a big issue,' said one Hong Kong shipbroker, who preferred not to be named.
But while not understating Zhang's comments, shipbrokers said the volume of Brazilian iron ore imported into China fell last year and mainland steel companies and traders benefited from a pricing advantage of shipping ore from Australia. While freight rates are higher from Australia to China compared with Brazil, the voyage length is much shorter - about eight to 10 days compared with about 40 days from Brazil.
Vale is building large ore carriers to generate increased economies of scale so it can more readily compete with the Australian ore producers.
Shipbrokers also pointed out mainland steel mills had signed long-term contracts with shipping companies including China Ocean Shipping (Group), which had also reduced the number of charters available in the Capesize sector.
One shipbroker said the impact on the dry bulk market from Vale's owned fleet would be felt in the next 12 to 24 months as the ships were due to be delivered between now and 2012. China imported 130.9 million tonnes of iron ore from Brazil in 2010, according to figures from the mainland's customs bureau. But this was down 9 per cent year on year, while iron ore imports from Australia climbed 1.4 per cent to 265.3 million tonnes. Imports from India were down almost 10 per cent to 96.6 million tonnes last year.
China has also been importing iron ore from other sources including Ukraine and Venezuela to reduce its dependence on imports from the three main miners, Vale, Rio Tinto and BHP Billiton.
'Zhang's comments should be seen in the context of what has been happening with China's iron ore imports and in the Capesize shipping sector,' said one shipping source.