Cooperation Agreement With Cosco Will Help Vale Lower Transportation Costs
Vale (NYSE:VALE) recently announced the signing of a cooperation agreement with China Ocean Shipping Company (Cosco) for strategic cooperation in iron ore shipping. [1] As per this agreement, Vale has agreed to sell and lease back four of its Valemax Very Large Ore Carriers (VLOCs) to Cosco and has committed to leasing ten more vessels built by the Chinese company. [2] The financial details of the agreement will be released upon closing of the deal.
The signing of this agreement is important for Vale as it would permit the docking of its Valemax ships in China, which until now was not permitted under existing rules. Vale, with its iron ore mines located in Brazil, suffers from a disadvantage when it comes to transportation costs, as compared to other iron ore majors such as Rio Tinto and BHP Billiton. These iron ore majors have their mining operations concentrated in Australia. Geographically, Australia is much closer to major iron ore consumers in Asia such as China, as compared to Brazil. The Valemax ships are an integral part of Vale’s strategy to lower transportation costs from its iron ore mines in Brazil to major customers in Asia.
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Benefits of Valemax Ships
The Valemax ships are Vale’s ultra-large vessels, which have a capacity of 400,000 dead weight tons (dwt). These vessels have 2.3 times the capacity of Vale’s Capesize ships, that ordinarily ply the route between Brazil and China. [3] The Valemax ships were built primarily to serve Vale’s markets in Asia, particularly China. China accounted for 47.7% of Vale’s iron ore and iron ore pellet shipments in 2013, with Asia as a whole accounting for 64.9% of these shipments. [4] China accounts for more than 60% of the global seaborne iron ore trade. [5]
The Valemax ships are not permitted to dock at Chinese ports under the existing rules, which only permit ships as big as 250,000 dwt. [6] Chinese shipping companies have lobbied hard to ensure that Valemax ships are not allowed to dock at Chinese ports. They argue that allowing Valemax ships to dock at Chinese ports will exacerbate overcapacity in the shipping industry. Overcapacity in the global shipping industry has lowered freight rates and forced many Chinese companies into the red. [7]
Reducing costs is critical for iron ore miners as iron ore prices have plummeted this year due to weak demand and an oversupply situation, created due to expansion in production by major companies despite the weakness in demand. ((BHP, Rio Gamble with Stacked Iron ore Deck, Mineweb)) Iron ore prices stood at $92.61 per dry metric ton (dmt) at the end of last month, around 32% lower than at the corresponding point of time last year. [8] As a result of the Valemax system, transportation costs from Brazil to China are currently about $22 per ton. [9] If Valemax ships were able to take cargo directly to Chinese ports, it would save about $7 per ton over current costs. To put this into context, Australian iron ore producers currently have around a $10 per ton advantage in terms of freight costs as compared to their Brazilian counterparts. [9]
Thus, if Valemax ships are allowed to dock at Chinese ports, it would significantly reduce Vale’s transportation cost disadvantage vis-a-vis its Australian rivals. With the signing of its cooperation agreement with Cosco, Vale has taken a step towards reducing this disadvantage.
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Notes:
- Vale and Cosco sign cooperation agreement on VLOCs, Vale Website [↩]
- After standoff, Vale and China’s Cosco both claim shipping victory, Reuters [↩]
- Shipping division, Vale website [↩]
- Vale’s 2013 20-F, SEC [↩]
- China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg [↩]
- Brazil’s Vale adjusts iron ore shipping, Chinadaily USA [↩]
- China permits giant Valemax to dock, Financial Times [↩]
- Iron Ore Spot Prices, Y Charts [↩]
- China wants shipping partnership with Brazil’s Vale, Yahoo Finance [↩] [↩]