Exclusive: Vale in talks to sell giant ships to China

LONDON Mon Sep 5, 2011 1:45pm EDT

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LONDON (Reuters) - Brazilian mining giant Vale (VALE5.SA) is in talks with Chinese and other ship owners to sell or lease its planned fleet of giant bulk carriers, a Vale official told Reuters on Monday.

The world's biggest iron ore producer had planned to own a fleet of 19 dry bulk freighters to cut shipping costs from Brazil to top iron ore importer China, but has now decided it no longer needs to have direct ownership of the vessels.

"We don't want to be a major freight operator or make money out of our shipping business," Vale's global marketing director Pedro Gutemberg said in a telephone interview.

"We just want to make sure that our freight cost doesn't shoot up. So any person that wants to partner with us is very welcome."

Market sources said the move may make it easier for Vale to finalize negotiations with Chinese ports after the miner failed to gain access to them for its first giant bulk carrier on its maiden voyage in June and rerouted it to Italy.

There had been speculation among traders that the vessel, Vale Brasil, was unable to berth at Dalian in China due to pressure from China's domestic shipping industry, which had urged the authorities to protect its commercial interests.

"Vale might be seeing the writing on the wall: sell out to China or risk damaging future iron ore sales prospects once new iron ore production projects come on stream. That would be very bad for Vale, enough to remind it that it is first and foremost a miner, and not a shipowner," said Nigel Prentis, head of research, consulting & advisory, HSBC Shipping Services Ltd.

George Lazaridis, head of research with Greek ship broker Intermodal, said: "It seems more of way to appease the Chinese shipowners so they don't create trouble in China."

"At the same time, Vale itself thought the market at this point is not a big threat -- rates are very low, there's no point in breaking hearts for something I am not going to really benefit that much from."

ACCESS TO CHINA

If a sale or a lease is agreed, Vale will sign a long term contract with the shipowners that will ensure the ships will only be used to transport Vale's iron ore from Brazil to China and other regions.

Vale declined to say which companies it was negotiating with, but an industry source said one of them was China's state-owned COSCO Group (600428.SS) (1919.HK).

The miner has already negotiated similar agreements with other shipping companies outside China but it has in the last month intensified talks with Chinese shipping companies, it said.

The port of Taranto in Italy was the first and so far only port to have granted formal access to the mega vessel Vale Brasil. Vale is still negotiating to gain access for its Valemaxes at Chinese ports with the relevant authorities and it is confident an agreement will be found soon, Gutemberg said.

"Whenever they understand better our strategy we believe they will accept it and negotiations will be finalized," he said. "We also believe we will be able to find an agreement with the Chinese shipowners soon. We are trying to reach consensus with everyone in our market."

Vale introduced its first giant dry bulk freighter in May, breaking a 25-year-old record by operating the world's biggest bulk carrier.

Vale currently owns 19 of 35 maxiships that have been commissioned in total while shipowners Bergsen, STX Pan Ocean and Oman Shipping own the remaining 16 and have signed a long term chartering agreement with Vale, Gutemberg said.

COST ADVANTAGE

The mega ships will cut freight costs from Brazil to China by 20 to 25 percent and will significantly reduce carbon emissions compared with other vessels, Vale said.

"I believe this is the next generation of ships and Vale wanted to be a pioneer but we don't want to be the owners, we just want reasonable freight rates." Gutemberg added.

The freight price Vale will pay to the owners of the ships will be based on a cost plus return of investment basis, where the return on investment is agreed with each shipowner and influenced by the credit conditions of the regions where it operates, he said.

The deployment of the maxi ships will weigh further on an already suffering freight market. The outlook for dry bulk rates has been grim as ship supply has outpaced demand to ship commodities.

Weaker freight costs may be one of the reasons that pushed Vale to put its fleet up for sale, according to some.

"It seems that with capesize rates so much lower now than they were in 2008, when most of these vessels were ordered, it really no longer is a major priority of Vale to take freight into their own hands," said Jeffrey Landsberg, managing director of dry bulk consultancy Commodore Research.

"Back in 2008 when capesize rates were $100,000/day, $200,000/day, and even more, it was important to protect the company from such costs. In the current market, and likely future, this is no longer the case, so it seems that they are very open to getting rid of some of those ships," he added.

(Editing by Anthony Barker)

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