Assessing the impact of new Valemaxes

Transcription

1 Assessing the impact of new Valemaxes 14th December 2015 Despite Vale doubling its fleet of Very Large Ore Carriers to serve the Chinese steel market, demand for other Capesize bulk carriers will still increase because of Vale s big expansion plans and cost competitiveness. However, the determination by Vale to use the Atlantic-Pacific route as a floating conveyor belt for iron ore shipment by controlling at least 70 so-called Valemax bulk carriers will increase the risk of the market being over tonnaged and volatility reduced across all size segments. That would strike a blow to independent owners and operators struggling to cope with the worst dry bulk market in three decades. Vale s new VLOCs possibly counting 39 vessels, in addition to the original 35 vessels Reports of Vale s newbuilding program continue to be patchy: In Japan, Nippon Steel s long-term relations with Vale has resulted in two series of Japanese-owned and built Valemaxes. Beforehand, Nippon Steel had accepted Valemaxes at the Oita, Kimitsu and Kashima sites, becoming familiar with the vessel sizes. This year, Nippon Steel has agreed 8-15 year timecharters with domestic owners to employ new Valemaxes for imports of iron ore from Brazil. The timecharters have been done with Mitsui OSK Lines, Nippon Yusen Kaisha, K -Line and NS United. In turn, MOL and NYK have contracted 240,000 dwt vessels at Imabari and K -Line and NS United have ordered 250,000 dwt vessels at Namura Shipbuilding. The two series will total 9 vessels altogether. In China, the two big shipowning groups will each sign contracts with Chinese shipyards for Valemaxes of 400,000 dwt. COSCO and China Shipping, through the joint venture China Ore Shipping, will order 10 vessels. Of these, 7 will be built at Shanghai Waigaoshao to be delivered from late 2017 and carry a price tag of USD 90 million each. The other shipowning group between China Merchants Energy Shipping and Sinotrans will also order 10 vessels, although Sinotrans role has not been confirmed. Two of the vessels will be built at China Merchants Heavy Industries. Already, COSCO and China Merchants own a total of 8 Valemaxes that they acquired from Vale. The new Valemaxes to COSCO and China Merchants are based on a 25-year contract of affreightment (COA) to ship iron ore and manganese ore from Brazil to China. An additional 10 Valemaxes of 400,000 dwt could be ordered by ICBC Financial Leasing at Yangzijiang Shipbuilding, utilizing the idle Jiangsu Rongsheng Heavy Industries. ICBC has this week purchased 4 VLOCs from Vale, following the moves by COSCO and China Merchants. If all of the Japanese and Chinese-built Valemaxes come to fruition, they will total 39 new vessels in the size range 240,000 dwt to 400,000 dwt and be delivered from 2017-onwards. They will add to the 34 Valemaxes already set into service, plus one coming in 2016, and form a 74-strong vessel fleet boosting the largest dry bulk carriers ever constructed. Vale s rationale for controlling a 100-strong fleet of VLOCs The pledge by Vale to build a land-bridge between Brazil and Japan/China with up to 100 Valemaxes is founded on the geographical dislocation of its iron ore mines to the Asian steel mills. The sea route between Tubarão in Brazil to Qingdao in China is 11,017 nautical miles, compared with 3,461 nautical miles from Port Hedland in Australia to Qingdao. At a service speed of 13.5 knots, bulk carriers are using 35 days at sea from Tubarão to Qingdao versus 10 days from Port Hedland to Qingdao, more than three times the duration.

2 At the start of the millennium, China imported a total 70 million tons of iron ore. India, a traditional short-haul supplier, had a 16% share. Australia was becoming the largest with 50% share and Brazil had gained a 24% share. In December 2001, China became a member of the World Trade Organization (WTO) which meant that China was compelled to lower import tariffs on energy and raw materials but gaining access to world-wide trade on finished goods, triggering a phenomenal growth in steel production and iron ore imports. In 2007, China imported over 380 million tons of iron ore, of which 142 million tons came from Australia and 105 million tons from Brazil. Source: Lorentzen & Stemoco Research The dramatic surge in China s imports of iron ore drove freight rates to historically high freight rates. Back then, Vale used to sell almost all of its iron ore on a Free on Board (FOB) basis. Up until 2007, most of the Chinese mills covered their tonnage requirements in the spot market or on COAs up to one year. The exception was Baosteel, the Shanghai-based steel mill, which had already done some longer-term deals. However, because of the dramatic tightness in the Capesize bulk carrier market, freight rates increased exponentially compared with the underlying iron ore market, and discriminated Vale against Rio Tinto and BHP Billiton because of the three-to-one distance. As the illustration below shows, in 2007 freight rates on the C3 between Tubarão to Qingdao averaged nearly USD 60 per ton, whereas the C5 between Port Hedland and Qingdao averaged almost USD 25 per ton. In order to sell at the Chinese landed price of USD 80 per ton, Vale was hurt by about USD 35 per ton compared to Rio Tinto and BHP Billiton. Thus, in 2008, Vale started carrying out the plan to reduce the freight element by selling iron ore in China on a CFR-basis and securing tonnage by controlling its own VLOCs. Initially, the program involved 35 Valemaxes, of which the final vessel PONTA DA MADEIRA has not been delivered. However, the plan was to expand the program to 100 Valemaxes to fully control the cargo flow from Brazil to China.

3 Source: Lorentzen & Stemoco Research/The Baltic Exchange New VLOCs will carry lower break-even costs than current all-time low freight rates A 100-vessel strong VLOC fleet would go a long way in serving Vale s shipments of iron ore to China. This year, we believe that Vale will sell 340 million tons world-wide, of which 180 million tons of iron ore will go to China alone. If all of this volume were to be carried by Valemaxes, some 110 vessels would be needed, according to our calculations. The 34 Valemaxes thus account for about one-third of Vale s VLOC requirements this year. However, so far the current Valemaxes are not making a positive contribution to Vale. Contracted at an average of USD 130 million, the vessels are considered expensive and old-fashioned by today s standards. The vessels are burning 96.7 tons of bunkers per day on a service speed of 15.4 knots. In addition, until recently all of the Valemaxes have been prevented from making direct passage to China because of the strained relations between the Chinese and the Brazilian authorities. Instead, the Valemaxes have served transshipment hubs in Oman as well as the Philippines and Malaysia. The transshipment costs have added USD 7 per ton to the Valemax freight costs. The breakeven costs of the current Valemaxes are about USD 21 per ton in total. This compares with the going C3 freight rate of USD 9.3 per ton. The new Valemaxes will take Vale from being punished by the VLOCs to being rewarded by the newbuilding program of the planned vessels. The new vessels of 400,000 dwt being built in China will cost USD 90 million, as mentioned. The bunker consumption will be reduced to 70 tons per day. Moreover, the new vessels, and probably the old, will be able to serve Chinese ports directly, thus improving the utilization and eliminating the transshipment costs of USD 7 per ton. In total, we believe that the breakeven costs for the new Valemaxes will be USD 8.25 per ton, lower than even the current C3 freight rate, which is at an all-time-low. Vale is loading iron ore onto Capesize and VLOCs at Tubarão and Itajaí, but is reserving the Valemax loadings to Ponta da Madeira further north, because of Tubarão s draft restrictions of 21.5 meters. Work is being done to dredge the Port of Tubarão to load iron ore onto Valemaxes. In China, six ports have been built to accommodate Valemaxes including Ningbo-Zhoushan, Maji Shan, Qingdao, Tangshan, Caofeidian and Dalian.

4 The Valemaxes sold to COSCO and China Merchants have made direct passage to Chinese ports, and the vessels now sold to ICBC are expected to follow suit. All the new Valemaxes planned for construction are expected to sail directly from Brazil to China. Allaying market fears of excessive dry bulk ordering Given that Brazil will export 180 million tons of iron ore to China this year, and that the Valemaxes will carry some 55 million tons of the trade, that will leave a market of 125 million tons to be carried by smaller VLOCs and Capesize bulk carriers. Using an average size of 180,000 dwt, that will require an additional 175 Capesize bulk carriers to serve the Brazil-China iron ore trade. Assuming that the Valemax fleet will increase from 34 vessels plus the last to be delivered, and the planned newbuildings of 39 vessels, the Valemax fleet will tally 74 vessels which will be delivered within The entire fleet will be able to carry 121 million tons, about two-thirds of this year s Brazil-China s exports. Without growth to the Brazil-China trade, the Capesize bulk carrier requirements will reduce from 175 vessels to just over 80 vessels, thereby cutting the Capesize bulk carrier requirements by more than a half. What s more, the risk of Vale backing additional Valemax newbuildings is inherently large, acting on the 100-strong vessel plan being carried out. Although the risk of Vale s newbuilding program reducing the Capesize bulk carrier requirements is pronounced, we believe that the Brazilian iron ore exports to China stand a good possibility of being increased, which could more than outweigh the many Valemaxes being put into service over the next four years. Lower iron ore prices have displaced Chinese domestic production with imports from overseas mines, predominantly from Australia and Brazil. Chinese iron ore production is being reduced at an annual rate of about 50 million tons per year, substituted in large for by imports from Australia and Brazil, as the illustration below shows: Source: Lorentzen & Stemoco Research/Statista

5 Both Rio Tinto and BHP Billiton have lower break-even costs than Vale, but the cash costs include the freight element. As noted, Vale s current fleet of Valemaxes has a break-even cost of USD 21 per ton, accounting for one-third of the iron ore carriages. When the new Valemaxes are fully introduced, the total break-even costs will be reduced by about USD 4 per ton, creating a level playing field between the three exporters. Source: Lorentzen & Stemoco Research We believe that Vale will increase capacity more than Rio Tinto and BHP Billiton and that Vale s share may be scaled up from 340 mill. tons this year to 460 million tons in 2020, with all incremental growth being directed to the Chinese market. The winning argument will be Vale s superiority in iron ore quality, allowing Vale to take market share from its Australian competitors. Source: Lorentzen & Stemoco Research

6 If panning out, an increase in Brazilian sales to China of 120 million tons until 2020 would equal increased demand for Capesize bulk carriers of 170 vessels and offset the reductions of 95 vessels being replaced by Valemaxes, meaning a net demand increase of 75 Capesize bulk carriers over the five-year period, meaning 13.5 million dwt. Vale phasing out VLCC-VLOC conversions Meanwhile, Vale will also phase out the VLCCs that were converted to VLOCs. Ahead of the IMO phase-out scheme for single hulled tankers, some 70 VLCC single hull tankers were sold for conversion to VLOCs for values up to USD 100 million. The vessels of dwt contributed to balance the hot market at this time. At today s bad market conditions, and the new Valemaxes entering the market, the 57 VLOCs left in the market will become redundant when their COAs expire, and are expected to be scrapped. A total of 17 million dwt will leave the fleet from today until 2024, offsetting new Valemax deliveries totaling around 15 million dwt.