SHANGHAI/SEOUL China is shielding its loss-making shipping industry by blocking from its ports giant vessels such as those mining giant Vale SA is building to cut the cost of sending iron ore to its largest market, analysts said on Wednesday.
China, the world's top iron ore importer, on Tuesday said its ports could not accept vessels with a deadweight over 300,000 tonnes, which encompasses the Valemaxes, 400,000-deadweight-tonne freighters that are large enough to hold three soccer fields end-to-end on their decks.
One of these Valemaxes, the Berge Everest, docked at China's Dalian port in December for the first time, and unloaded its iron ore cargo.
But analysts said China was now clearly trying to protect its own shipping industry, which has been hard hit by the economic downturn and at a time when benchmark shipping rates have fallen nearly 70 percent since October, slashing revenue for shipowners a worldwide.
China may also be playing hardball to try and get as better deal out of its main supplier Vale, the analysts said. 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.
"It was certainly about regaining control over the shipping industry," said Graeme Train, a Shanghai-based analyst at Macquarie. "Its access to the world all comes from the east coast... and it is fully incentivized to build a big fleet of ships to reduce the cost of shipping."
"By Vale controlling their own freight and wrapping up all the prices on a cost-and-freight basis, China would have lost control over the overall cost of shipping, which would have economic knock-on effects."
Hu Yanping, a steel analyst at industry portal CUsteel.com, predicted China would reverse its ban on large vessels when the shipping market recovered. The downturn forced top Chinese shippers COSCO and Grand China Logistics to halt payments to foreign shipowners last year.
The Berge Everest was the only Valemax allowed into China, with its arrival stunning shipping industry since the powerful China Shipowners Association had opposed the vessels, saying they were an attempt by Vale to monopolize the shipping and iron ore markets.
The decision to ban the giant vessels was a sobering reminder of the difficulties foreign firms face in doing businesses with China, where the lines between politics and business are often blurred.
"The broader implication of this, I suspect, is that we could see more of these erratic protectionist measures as cost pressures build in China and many if these state-owned firms see their profits squeezed over the coming months," said Peter Hickson, a commodities strategist at UBS Bank.
The ruling, which was announced by the Transport Ministry, is also unclear. Ministry officials could not be reached for comment.
Trade publication Lloyds List said on Wednesday that excluding the Valemaxes, there were 26 Very Large Ore Carriers (VLOCs) above 300,000 tonnes currently in use, 11 of which docked in China at some point last year. Some crude oil tankers also exceed the deadweight tonne limit.
"Although it will come as a huge blow to the world's largest iron ore producer and its 35-strong fleet ... the decision will also have implications for the rest of the bulk carrier fleet over 300,000 tonnes," Lloyds said, adding that its tracking data also showed that large vessels were still scheduled to arrive at Chinese ports in the next two months.
CONSTRUCTION FULL STEAM AHEAD
Despite the Chinese ban, Vale's plans to expand its Valemax feet appear to be on track. The company is spending some $2 billion on the fleet of as many as 35 vessels.
Shipbuilders in China and Korea, which between them have orders for some 28 vessels, said they have not received any cancellations. The firms include Daewoo Shipbuilding & Marine Engineering, STX Pan Ocean and China Rongsheng Heavy Industries Group Holdings Ltd.
"Construction for these Valemaxes has started and we've started steel plate cutting for the ships," said Michael Cheng, a spokesman of China Rongsheng, which delivered the first of 16 carriers to Vale in November.
Determined to access China, Vale is readying iron ore distribution bases in the Philippines and Malaysia.
The transshipments hub would add to Vale's shipping costs, making it less competitive than rivals Australian rivals BHP Billiton Ltd and Rio Tinto.
But analysts said cost was not really an issue for the Brazilian miner.
"It (trans-shipping in the Philippines) adds a little bit of a cost but for Vale it has never been so much about the cost per tonne as being about maximizing production capabilities," said Macquarie analyst Train.
"They need to get ore as quickly as possible from the west to the east and reduce their inventory in Brazil because that backs up their whole production chain. They can still do that so this is not that big a deal for them."
(Additional reporting by David Stanway in BEIJING, Alison Leung in HONG KONG and Randolph Fabi in SINGAPORE; editing by Miral Fahmy)