BRICS Fight, Brazil v PRC: 'Valemax' Cargo Ships

Frank, it's the big hit...the mothership! [Captain Beefheart]

The height of the pre-global financial crisis frenzy was manic not just in financial markets but also in others. Most notably, there was this great expectation that China was the be-all and end-all of global commerce as commodity prices surged globally. After all, who would feed materials to this giant workshop to the world? Post-global financial crisis, we are learning that even the great China growth story has its limits. With many of the markets for its finished goods in less-than-fighting condition, Chinese growth has slowed down too.

Unfortunately, one of those who bought into the great China growth story circa 2008 was fellow BRICS nation Brazil. Seeing the PRC as the primary growth market for steel exports, Brazil gambled large in reducing its cost disadvantage with Australian-sourced iron ore by building the largest bulk carriers ever made, Valemax-class vessels:

It is now almost three years since a ship the width of a football pitch and longer than the Eiffel Tower set off from Brazil bound for China. The world’s biggest bulker — the Vale Brasil and its sisterships of 400,000 dwt — were expected to herald a new era of cheaper freight. But the ultimate success of a bold $8bn plan to construct 35 vessels by their Brazilian mining group owner, Vale, remains an unproven gamble. The ships are still mired in controversy because of the unwillingness of the Chinese government to give them a clear green light to operate in the local ports for which they were constructed.

Contrary to plan, Vale instead encountered resistance from Chinese shipping concerns who sought to have the vessels prohibited from delivering to China by declaring them unsafe:

Brazil needs a kickstart and the Valemax superships were meant to provide it when they were ordered in 2008 at the height of the China commodity boom. Vale, the world’s biggest single provider of iron ore, was concerned that shipping rates from Brazil to China had soared to over $100 per tonne. This was double the cost to BHP Billiton and Rio Tinto of carrying rival cargoes to Chinese steel mills from Australia.
But as we subsequently found out, the Chinese shipping lobby was unhappy about seeing Vale damage its own lucrative dry bulk maritime business. The Chinese owners convinced the Ministry of Transport that there were safety fears and a ban was imposed on the discharge of all bulkers over 250,000 dwt. The Vale Brasil found itself unable to dock at its planned discharge point of Dalian and had to reroute to Italy.

Hence, while Vale is inordinately proud of its hulking vessels, even its own route charts show they are not calling at Chinese ports they were intended to serve.  More recently, however, the Chinese have themselves begun considering costs savings from using these vessels. There is news that Chinese logistics firm COSCO will even help Vale construct Valemax ships for serving the PRC market on a leaseback deal:

Vale signed an accord with China Ocean Shipping Co. to transport iron-ore with giant vessels known as Valemax as the world’s largest producer seeks to curb costs amid slumping prices of the steel-making ingredient. Vale will transfer four of its 400,000-metric ton vessels to Cosco, as China’s largest shipper is known, and charter them for 25 years, the Rio de Janeiro-based miner said in a statement today. Cosco will also build 10 vessels of similar size to ship Vale’s iron ore. No financial terms were given.

With global iron ore prices slumping to a five-year low post-global financial crisis, the explanation for state-owned COSCO's volte face is simple: it eked out a bit more profit banning Valemax from ships delivering to China when steel prices were high and customers did not mind paying a premium. Now that they are low, steel customers are squeezing logistics firms for lower prices that less efficient (read: smaller) vessels cannot deliver on. Hence the sudden shift to accepting Valemax ships.

You can't fight progress forever, and these seafaring leviathans are the future.