New | China seizes upper hand in iron ore market after deal with Vale
“Resolution of the dispute coincides with a paradigm shift in the global iron ore trade from a seller’s market to a buyer’s market. China has regained pricing power it lost in the past decade over imported iron ore,” said Jiang Ming, an analyst at Haitong Securities
Beijing’s removal of the ban on Brazilian miner Vale’s giant iron ore carriers is a sign of mainland China’s strong hand in the global iron ore market as major producers Brazil and Australia scramble to preserve market shares in supplying the commodity to the world’s second-largest economy.
A circular by China’s Ministry of Transport published on late Monday amended the regulation for mainland ports to handle mega dry cargo ships, legitimising the docking of vessels with a 400,000 deadweight ton capacity and effectively ending a three-year spat between Beijing and Brazil over Vale’s giant ore carriers known as Valemax.
“Resolution of the dispute coincides with a paradigm shift in the global iron ore trade from a seller’s market to a buyer’s market. China has regained pricing power it lost in the past decade over imported iron ore,” said Jiang Ming, an analyst at Haitong Securities.
China is the world’s largest consumer of iron ore, the main ingredient for steel making. Some 85 per cent of that consumption relies on imports from Australia and Brazil.
Vale, facing more than three times transit time to China than its Australian competitors, moved to build the Valemax class in 2008, the world’s largest cargo ships, in a bid to slash transport costs. The vessels were barred from entering enter the mainland since 2012 after authorities said the ships were a threat to safety in its ports. The true reason, though, was widely believed to protect the interest of national carriers such as China Ocean Shipping Group (Cosco).
The world’s biggest miners, including Vale, Rio Tinto, BHP Billiton and FMG, are feeling the pinch from an output binge in the past few years, which have depressed the price of iron ore amid a palpable slowdown in the mainland economy, said Jiang.
“The expanded mining capacity is irreversible, but China’s demand for iron ore is slowing down. It is in Vale’s interest to sign more freight contracts with national carriers to get a head start in seizing market share, locking in sales for the expanded production,” he said.
Vale last year struck 25-year freight contracts with Cosco and China Merchants Energy Shipping, both state-owned, to ship iron ore to China, the first signs of a thaw in the standoff. Details of the agreements remain sketchy, but they each involve building 10 new carriers, likely in mainland shipyards.
Jiang estimated the freight contracts will help Cosco and CMES to notch 390 million yuan and 280 million yuan in extra annual profits over the 25-year period.
“It is also likely that Australian miners will follow suit to secure market share in China. If so, this will lend substantial help to the bottom-lines of Chinese carriers, which have been vulnerable to short-term volatility in the shipping market due to their large exposure to spot cargo,” Jiang said.
But Beijing’s euphoria could be at the cost of the global dry bulk shipping market, with rates now hovering at almost 30-year lows due to a vessel supply glut.
“This development generally mitigates against any sharp rebound in the dry bulk [shipping] market,” said Martin Rowe, managing director at Clarkson Asia, part of Clarkson plc, the world’s biggest shipping brokerage.
It would not be an economical decision, but a political one, if more mainland carriers opt to order new ships to serve iron ore imports. “Why pay for the new tonnage when you can obtain it from the market at such a low price? Unless the government has taken the decision to keep shipyards employed, I wouldn’t think the political imperative to secure iron ore supply is strong enough for national carriers to order new ships. After all, iron ore is unlike, for example, crude oil, the supply of which must be secured,” Rowe said.
