RPT-WRAPUP 3-Vale-China standoff over mega ore ships deepens

Tue Jan 31, 2012 8:36pm EST

* China says move due to shipping downturn, safety issues

* China shipowners, steel industry oppose mega carriers

* Dispute adds to growing list of China-Brazil trade woes

* Vale sees Malaysia, Philippine hubs saving Valemax plan

By Fayen Wong and Jeb Blount

SHANGHAI/RIO DE JANEIRO, Jan 31 (Reuters) - China banned a giant new class of ship from its ports on Tuesday, a move that checks efforts by mining giant Vale SA to cut the cost of shipping iron ore to its largest market and risks straining trade relations with Brazil.

China's trade ministry said it forbid the berthing of Vale's 400,000-deadweight-tonne "Valemax" vessels and other giant freighters, to protect its own ocean-freight industry.

This action comes at a time when benchmark shipping rates have fallen by two-thirds since October, slashing revenue for shipowners a worldwide.

"At the end of the day, they (China) want to support their own," said George Lazardis, an analyst at Greek broker Intermodal.

"They are interested in giving support to their shipowners, which are starting to become a significant force."

As the world's second-largest and sixth-largest economies increase their ties, China and Brazil have clashed over iron-ore, shoes, aircraft, toys, automobiles, pesticides, clothing and the right to own Brazilian farmland in recent years.

China overtook the United States to become Brazil's largest trading partner in 2009, and Brazil is a vital source of the raw materials and food needed to sustain the world's second-largest economy.

China is concerned soaring prices for soybeans, iron ore and other raw materials will put it too much at the mercy of commodity exporters, while Brazilian industry says cheap Chinese manufactured goods unfairly compete with local industry.

For the China Shipowners Association and major steelmakers, the Valemaxes, some of the largest ships afloat, could be a "Trojan horse", allowing Vale to hold out the promise of lower transport costs as a cover for what they see as its true goal: dominance of the world iron-ore market.

Vale is the world's largest iron ore miner, accounting for more than a quarter of all seaborne trade in iron ore, the main ingredient in steel. China is the world's largest steelmaker.

The giant ships are central to Vale's efforts to compete with Australian miners BHP Billiton and Rio Tinto , whose mines are closer to China, the biggest iron-ore consumer.

The Valemax ships are large enough to hold three soccer or U.S. football fields end-to-end on their decks.

"They (China's rulers) are not interested in whether Vale will be able to provide cheap imports in comparison to Australian imports," Lazardis said.

In December the China Shipowners Association called on Vale to "immediately stop" building its fleet in a note on its Web site and said Vale was trying to create "a monopoly" and engage in "unfair competition."

China's decision suggests Vale may have made an unwise and costly investment in one of the most talked-about shipbuilding ventures of the past decade.

Vale's press office in Rio de Janeiro declined to comment.

No Chinese ports have regulatory approval to receive dry bulk carriers of more than 300,000 tonnes. The Dec. 28 arrival of the Berge Everest, a 388,000-deadweight-tonne Valemax, in China's port of Dalian carrying Vale ore from Brazil was probably a bureaucratic fluke, shipping industry sources said.

The Berge Everest was the first Valemax to visit a Chinese port. Vale and shipping company partners with long-term contracts are building 35 of the Valemax giants for an estimated $4.2 billion in Korean and Chinese shipyards.

"This is really weird especially since most of them have been built or are going to be built in China," said Bernardo Lobao, steel and mining analyst at Studio Investimentos, a Rio de Janeiro-based investment fund.

"This is a real tug-of-war and China is playing very tough," he added. "China's attitude is pretty amazing when you consider that Vale went against its own government that wanted the ships built in Brazil and decided instead to build them in China to please its steelmaking clients."

China may be trying to use access to force Vale to cut iron-ore prices or to get a better deal for Chinese shipping companies that are bidding to buy the Valemax ships Vale owns and operates itself, Lobao said.

Vale Chief Executive Murilo Ferreira was a founding partner of Studio Investimentos in 2009 before moving to Vale in 2011.

Chinese financial magazine Caixin said on Tuesday that Vale had apparently got around the regulation in December by using the Berge Everest, a carrier owned by a Singapore company and leased back to the Brazilian miner, to deliver ore.

Chinese maritime regulations require shipowners, or representatives, to cooperate with customs when applying for special entry permits.

The transport ministry said its decision to bar the mega-ships was also in part linked to maritime safety issues. In November a Valemax ship, the Vale Beijing, developed cracks in its hull while loading for its maiden voyage at a Vale port in Brazil and was pulled from service.

COSTLIER OPTIONS

With Beijing keeping its ports closed to Valemaxes, the Rio de Janeiro-based miner will have to rely on a costlier trans-shipment hub in the Philippines and Malaysia to ensure its mega-ships, each costing around $110 million, remain employed.

The transhipment centers' costs are unlikely to outweigh the savings from using the Valemaxes, Lobao said.

The Malaysia center will be able to stock 60 million metric tons, about a fifth of the firm's annual output of 300 million tonnes, starting in 2014.

The world's largest dry bulk floating storage vessel, Ore Fabrica, owned by Vale, has docked in the Philippines' Subic Bay Freeport, a spokeswoman for the port said on Tuesday.

The 280,000-deadweight-tonne vessel will be used to transfer iron ore from the Valemaxes to smaller ships for transport to China and other Asian markets such as Japan and South Korea starting in February, Vale said in a statement Tuesday.

Vale's preferred shares, the company's most-traded class of stock, gained 2.6 percent in Sao Paulo to 42.69 reais, a four-month high. The Bovespa Index of the Sao Paulo stock exchange's most-traded stocks rose 0.48 percent.

BAD INVESTMENT?

In 2008 Vale inked a contract with Rongsheng Shipbuilding and Heavy Industries of China to build 12 carriers valued at $1.6 billion and is counting on a fleet of 35 Valemaxes.

China's latest snub highlights the difficulties foreign firms face when doing business in China, where many senior executives are close the Chinese government.

China Shipowners Association Executive Vice-President Zhang Shouguo is a former deputy director of the water transport division of the Ministry of Transport.

With the government owning many companies, what would be commercial information in a capitalist country could also become a state secret in China.

Rio Tinto's iron-ore negotiations manager, Stern Hu, was arrested and charged in 2009 with stealing state secrets and sentenced to 10 years in jail.

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