Shipowners have tried to block the huge vessels poised to bring Brazilian iron ore into nation’s ports

China’s biggest shipping companies are going head-to-head with the world’s largest iron ore supplier in a battle over access to its ports.

The controversy dates to 2007 when Brazilian miner Vale SA started mapping out plans for a fleet of super-sized ore carriers and complementary port facilities to serve Asian customers, mainly Chinese steelmakers.

Vale’s focus sharpened in December 2009 with a project to build distribution centers in China, the world’s largest steel producer, and other parts of Asia.

Since then, the company has christened 15 of its specially built, 400,000-ton Valemax ships. It’s also started work on an ore distribution center in Malaysia. And it plans to launch another 20 Valemax ships by 2013.

The battle, meanwhile, is over a pivotal component of the Vale strategy: Shipping companies such as COSCO Group and Sinotrans&CSC Holding are opposing the company’s request for government permission to dock and unload Valemax ships at three seaports – Dalian, Majishan and Qingdao.

Companies represented by the China Shipowners’ Association have been pressuring the government to ban Valemaxes. But Vale and its allies, including Chinese shipyards hired to build the ships, are lobbying for an open door.

Hints of a possible compromise emerged on May 30, when association Executive Vice President Zhang Shouguo said the COSCO-Vale row could soon end.

Association Chairman Wei Jiafu and Vale CEO Murilo Ferreira “have exchanged correspondence,” Zhang said. “The consensus between the two sides is for dialogue rather than confrontation, to negotiate a settlement to resolve the current conflict.”

Nevertheless, the ports are still closed to Valemax ships, forcing the Brazilian ore supplier to wonder and wait.

“We hope that in the near future we can directly berth at ports in China,” said Joan Mendes Faria, global business development director for Vale in Singapore. “But we’re not sure about this.”

“I don’t expect a winner and a loser in this situation,” a former COSCO executive said. “The final result will be a compromise.”

Competitive Carriers

Chinese shipping companies have serious financial issues fueling their complaints: They’ve seen profits squeezed in recent years and feel threatened by the looming competition from giant Vale ships on critical Brazil-Asia sea routes.

In January, the Ministry of Transport issued a circular banning certain large ships from its ports, which ended Vale’s hopes of unloading Valemax ships at China ports.

In early May, COSCO President Ma Zehua said Vale had been boycotting COSCO’s fleet for two months due to its opposition to the Valemax ships.

Vale denied Ma’s accusation, saying its core business is mining, not shipping, even though it has invested US$ 4.2 billion in the ore carrier fleet. It plans to directly operate 19 vessels and work with other shipping companies to run the rest.

Ma’s comments led to meetings between Vale executives, including Faria, and shipowners’ association officials. A source who attended the meeting said one topic discussed was a letter Zhang wrote to Vale officials in which he said that all Chinese shipowners opposed Valemax access to ports.

Association officials at the meeting called for Vale to let COSCO carry its ore, and stop building or at least reduce the capacity of unfinished Valemax ships to less than 350,000 tons to meet safety limits set by the Ministry of Transportation.

However, Faria told Caixin that the company’s orders for the ships had been signed long ago and would not be changed.

The full Valemax fleet, Vale officials said, would account for 4 percent of global dry bulk freight capacity and haul about 44 million tons a year to Asia.

Last year, Vale’s annual report said, the miner sold 186 million tons of iron ore and pellets to Asian clients. Chinese bought 131 of those tons.

Long Haul

Ore ships leave ports in eastern Brazil for journeys around the Cape of Good Hope in South Africa and across the Indian Ocean before arriving in China some 11,000 nautical miles and 70 days later.

Vale’s business strategy is all about cutting the cost of a long voyage from Brazil and beating iron ore miners in Australia in the competition for Chinese customers.

Barclays Bank and Clarksons, a shipping consultant, said one Valemax ship on a Brazil-China route would carry about the same amount in a year as a smaller, so-called capesize vessel making more trips on the Australia-China route, but did it for cheaper.

Faria said Vale wants to dock at Chinese ports, but has been forced to concentrate efforts on a multibillion-dollar port facility in Perak, Malaysia, which has not been completed.

An official for a shipowner said the Perak center’s loading and unloading fees are about US$ 15 per ton, and are in addition to the US$ 10 per ton cost of shipping ore to China.

If Vale officials “really want to save money, they need to establish a distribution center in China,” the source said.

For now, a source close to Vale said the company has shelved plans for distribution centers in China. The company “needs to be cautious in the future, because this involves a lot of interests,” he said.

On the other hand, iron ore analyst Zhang Jiabing at the research website Umetal.com says Vale might halt work at the Malaysian center if the Chinese government gives Valemax ships access to its ports.

Port officials at Majishan, Qingdao and Dalian want to serve Valemaxes, said a source close to a COSCO subsidiary COSCO Bulk Shipping (Group) Co. Ltd. Each is expanding facilities in hopes of handling the giant vessels.

Vale would like to cooperate with shipowners through long-term agreements. But a source at an international shipping said COSCO and other Chinese companies favor more risky, short-term agreements that offer better profits.

The source close to Vale said at least two Chinese companies have shown interest in working on a Valemax deal. Caixin learned that one called Grand China Shipping Development discussed a cooperative deal with Vale that failed due to financial issues.

Zhang said Vale also has good relations with Chinese steel companies because its ore prices are slightly lower than those from Australia. A steelmaker in southern China, for example, recently increased the percentage of Vale ore it buys by 10 percent.

Having steel mills on Vale’s side “is good for the future of Vale’s large ships,” he said.

By staff reporters Pu Jun and Wu Jing