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Vale-China standoff over mega iron ore ships deepens

Monday, 06 February 2012 | 00:00
Beijing has effectively barred mega iron ore ships owned by Brazilian miner Vale SA, stepping up protection of the domestic shipping industry and control over imports of the key steelmaking ingredient.
China's Ministry of Transport on Tuesday, citing a downturn in the shipping industry, banned giant dry bulk vessels and oil tankers with immediate effect. It did not specifically mention Vale in the new regulation, which affects all large vessels including the fleet of 400,000 deadweight tonne vessels called Valemaxes.
The statement comes just a month after Vale managed to unload iron ore from its 388,000-tonne vessel Berge Everest at Dalian port. The shipment swiftly drew an outcry from the influential China Shipowners Association, which has been actively lobbying Beijing to ban Vale's giant carriers.
The Shipowners Association and powerful steelmakers have said that Vale's fleet of giant carriers could be a "Trojan horse", which would allow the miner to monopolize the shipping and the iron ore markets in the world's largest importer of the raw material by sending supplies cheaper than could rivals such as Australia's Rio Tinto and BHP Billiton .
"At the end of the day, they (China) want to support their own. They are not interested in whether Vale will be able to provide cheap imports in comparison to Australian imports," 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 over the past couple of years, and to help that part of the industry grow."
At present, no Chinese ports have regulatory approval to receive dry bulk carriers of more than 300,000 tonnes, and industry sources have said Berge Everest's entry to Dalian's Port was probably a bureaucratic fluke.
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.
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 to ensure its mega ships, each costing around $110 million, remained employed.
Vale is already building an Asian distribution center in Malaysia that 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 told Reuters on Tuesday.
The 280,000 deadweight tonne vessel will serve as a platform to transfer iron ore from the so-called Valemaxes to smaller ships for transport to China and other Asian markets such as Japan and South Korea.
BAD INVESTMENT
Vale inked a contract with Rongsheng Shipbuilding and Heavy Industries of China in 2008 to build 12 carries valued at $1.6 billion and is counting on a fleet of 35 Valemaxes to slash shipping costs to China to help it better compete.
But China's latest snub shows Vale may have made a bad and costly investment in one of the most talked-about shipbuilding ventures of this decade.
The episode also highlights the difficulties foreign firms face when doing businesses in China, where many senior executives are closely intertwined with the Chinese government and can wield immense power in influencing policy decisions.
China Shipowners Association Executive Vice-President Zhang Shouguo is also a former deputy director of the water transport division of the Ministry of Transport.
With the government owning a raft of companies, what would be commercial information in a capitalist countries could also become a state secret in China.
Rio Tinto's iron ore negotiations manager, Stern Hu, was arrested and charged in 2009 for stealing state secrets and sentenced to 10 years in jail.
Source: Reuters
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