Biggest Commodity Ships Hang In Limbo

Biggest Ships – The Vale Brasil, the biggest commodity ship ever built, and was designed to carry iron ore to China from South America. After six months in operation, it hasn’t done that once.

China’s refusal to accept the Brasil has derailed Vale SA (VALE3)’s push to control shipments to its biggest customer by building up a fleet of 35 ships, each almost as large as the Bank of America Tower in New York. Rio de Janeiro-based Vale, the world’s biggest iron ore miner, ships about 45 percent of sales to China, the largest consumer of the steelmaking ingredient.

Vale’s plan, which includes buying 19 vessels for $2.3 billion, has spurred opposition from Chinese shipowners who say it will worsen overcapacity, slumping cargo rates and industrywide losses. Steelmakers are also likely against it as the ships would give Vale more control over pricing and delivery, said Chang Tao, a China Merchants Securities Co. analyst.

“Nobody in China wants Vale’s fleet to come,” he said. “Not shipping lines, not shipowners, not steelmakers.”

The miner may struggle to find alternative uses for all ships as no other markets are as big, he said. Vale also likely can’t cancel vessel orders or quit leasing contracts without paying “very heavy penalties,” said Ralph Leszczynski, the Beijing-based head of research at shipbroker Banchero Costa & Co.

“I’m pretty sure that Vale themselves have by now realized that they made a big mistake,” he said. “I find it really incredible that they committed so much money in this project without first getting written assurances from the Chinese side that they would be able to use the ships.”

The company is also investing $1.37 billion to set up a distribution centre in Malaysia that will be able to handle the very large ore carriers. Transferring cargo there to smaller vessels for shipment to China would likely increase freight costs, eroding at least some of the gains from the larger vessels’ size and fuel efficiency, according to China Merchants’ Chang.