Vale targets China firms over mega ship standoff

Brazil's Vale has stopped hiring vessels from some Chinese shipping firms in retaliation for Beijing's efforts to keep the miner's huge ships out of the country, traders and industry sources said.

Chinese shipowners convinced Beijing in January to block the biggest dry bulk ships from entering Vale's top market due to concerns over safety and the vessels' potential impact on loss-making domestic shipping companies.

The ongoing tensions over Valemaxes, which can carry up to 400,000 tonnes of cargo, underscores how the economic interests of the world's largest consumer of commodities - China - and one of the world's largest suppliers of them - Brazil - are often at odds.

"There are indeed some business conflicts between Vale and China, and Vale indeed has halted the use of some Chinese ships," said a Chinese industry official familiar with the dispute, who did not want to be named because of the sensitivity of the matter.

A Hong-Kong based iron ore trader said Vale had stopped using Chinese iron ore carriers "about four months ago to get even with the Valemax ban by the Chinese government. Vale officials in Asia and at company headquarters in Rio de Janeiro were not immediately available for comment.

The miner's huge ships have been forced to take a more costly route to deliver iron ore to China due to Beijing's ban, opening up an iron ore transshipment hub in the Philippines' Subic Bay port in February.

At the Philippine port, Vale hires smaller cape size vessels from other ship owners via public tenders to transport the iron ore to China. Industry officials said Chinese companies, such as China Ocean Shipping Co (COSCO Group), have been excluded from participating in these tenders, industry officials said. "I hope this can be solved. All of them should look to the long term, not be emotional and should not take any actions that will violate the market principle," said Zhang Shouguo, secretary general of China Shipowners' Association. State-owned COSCO, hit hard by a severe downturn in the dry bulk freight market, has been the most vocal critic of Vale's huge ships. COSCO and others fear that the ships will be used by the miner to monopolize the lucrative iron ore trade between the two nations.

The plunge in world shipping costs has been a boon for Vale and consumers and devastating for shipowners. Since October the Baltic Capesize Index, a benchmark for the cost of shipping used to move most of the world's iron ore fell by more than half to 1,618 points. According to the index, Cape size freight rates are now only 39 percent of the average for the last 12 years. While Vale doesn't own all the ships itself and plans to sell those it owns, it helped finance them by giving Valemax owners such as Berumuda-based Berge Bulk and Korea's STX Pan Ocean Co. exclusive, long-term ore shipment contracts.

Vale sells around 40 percent of its annual iron ore output of about 300 million tonnes to China and sees the ships as the best way to compete with its main Australian rivals, BHP Billiton and Rio Tinto.

Closer to China, BHP and Rio Tinto's Australian mines have a transportation cost advantage over Vale's more-distant Brazilian ore reserves. With as much as double or more of the capacity of many older Cape-size vessels, the Valemaxes are longer and wider than three soccer or U.S. football fields laid end to end. That size provides efficiency and economies of scale that narrow Vale's transportation cost gap with Australia.

China's ship owners allege that the costs outweigh the benefits. "Vale's ships are too big and are beyond Chinese ports' capability to handle safely," Zhang said. "They should alter those ships to below 350,000 deadweight tonnes and stop building those in the pipeline. "Zhang's calls for restraint may be complicated by the fact that most of the 35 ships Vale is building or helping finance are being built in Chinese shipyards, using Chinese steel and with help from Chinese-state-backed loans.

Vale has been unwavering in its plan to flood the world's shipping market with dry bulk capacity, after it was hit by sharp spikes in global shipping rates in 2007 and 2008. At least seven of these vessels have been delivered and are in service. Vale's preferred shares, the company's most-traded class of stock, rose 0.59 percent 39.45 reais in trading in Sao Paulo. The BM&FBovespa index of the most-traded stocks on the Sao Paulo exchange rose 0.52 percent.

By Reuters