Brazil’s iron ore ship finally comes in

 Michael Sainsbury
Beijing

So. The first of the giant Brazilian iron ore ships from Vale, the world’s second largest iron ore producer and main competitor to Australian miners, has once more been allowed to dock in China.

The only previous time this happened, in 2011, was thought to be a mistake.

Known as the Valemax, the ships are the largest dry bulk cargo ships ever to ply the high seas; as long as three football fields and 400,000 tonnes a piece. They carry enough iron ore to make 270.000 tonnes of steel. Vale has ordered 35 of them which are all due to have been in service by this year.

The ships were banned in early 2012, for China’s usual opaque reasons but generally seen as being to protect its own freight business amid a worldwide glut. Yet the decision has appeared all the more odd because Australian companies were always seen as the Chinese steel industry’s number 1 enemies, not statist, Brazil.

This is not good news for Australian mining companies. Australia’s great advantage in selling China iron ore has always been its proximity and subsequent much lower cargo cost. This more than made up for slightly lower quality product.

Shipping from Australia to China to costs about $7 per tonne using with capesize ships of 180,000 tonnes, the same sized ship from Brazil is $17 per tonne, Tim Murray, J Capital Research’s ace iron ore analyst (and a favorite LRB China bear) explains.

Murray says that Valemax can take double the volume so it will probably cost about $10 per tonne China from Brazil now which will bring price pressure on Australian iron ore.

To cope with the ban Vale built a floating hub in the Philippines and is constructing a permanent, land-based transhipment centre in Malaysia which is scheduled to open in 2014 and will give it a nifty pan Asian distribution centre.

So now as iron ore prices once more start to look softer, here come the Brazilians with a better deal.

If Andrew Forrest’s Fortesuce Metals Group needed any more encouragement after its near death experience last July to run as fast as it can in ramping up its capacity to get its cost per ton down this would be it. Still, others argue that conversely, cheaper Brazilian iron ore – the world’s best with a purity of about 64 per cent (compared with top Pilbara ore at 62 per cent and lesser product such as FMG’s at 58 per cent) – could actually be good for FMG with Chinese mills increasingly preferring a mix of 64 per cent ore and 58 per cent, cutting out BHP particularly and a chunk of Rio Tinto’s product (it also mines a fair bit of 58 per cent). Whichever way you cut it, the big ships change the game somewhat.

There’s slightly better news, albeit by way of schadenfreude, for Australia’s iron ore giants from China this week, with further details of the trials of Shan Shanghua, the belligerent former chief of the China Iron and Steel Association. Readers close to the iron ore sector will recall that Shen was the bloke who effectively – and inadvertently – blew up the 40 year long tradition of annual iron ore price negotiations between Chinese steel mills and the big  three miners (as well as Vale, Rio Tinto and BHP Billiton).

CISA took over the price negotiations from China’s premier steelmaker, Shanghai based Baosteel in 2009 after the price on 2008 hit record highs. But Shan failed to reach any deal, in the process four Rio Tinto executives including Australian Stern Hu were arrested and later jailed for taking bribes and a China version of industrial espionage that would be seen as business intelligence in the west. During this process Shan made himself no friends, quite probably on the Chinese side as well, and he was shifted out for the job as soon as a decent interval was allowed to pass.

Now it has emerged that in the job he held previous to his CISA role he himself had his hand in the till, embezzling more than US$600,000 – it is alleged.

That may be small comfort to Hu and his colleagues but show that in the world of underhanded (Chinese) business, what goes around often also comes around.

You can read the full report on Shan from Caixin magazine here:

http://english.caixin.com/2013-04-15/100514612.html