China Lifts Ban on Valemax Vessels: Will Dry Bulkers Be Affected?
Is the Current Dry Bulk Shipping Recovery Sustainable?
China lifts ban on Valemax
On July 2, China lifted the three-year old ban on docking Valemax ships at Chinese mainland ports. Valemax vessels are ultra-large vessels, capable of carrying 400,000 DWT (dead weight tons) each. Valemax ships were specially designed by Vale SA (VALE) to lower its transportation costs and allow it to effectively compete with its peers from Australia, including BHP Billiton (BHP) and Rio Tinto (RIO).
Signs that the ban would be lifted began to appear in September 2014, when Vale signed a deal to sell and lease back ships from the China Ocean Shipping Company. The arrangement allows the Chinese shipping firm to share in the profits. Since then, Vale has signed many more such sale and leaseback deals with Chinese shipping firms.
The Chinese Ministry of Transport originally imposed a ban in 2012 citing technical reasons. However, it was widely seen as a lobbying attempt by large state-owned shipping groups. Before the ban was lifted, Valemaxes used to dock at ports in the Philippines and Malaysia, from where China-bound cargoes were loaded onto smaller ships. This system was, however, more time- and money-consuming.
According to Vale’s estimates, the use of Valemax vessels would save $4 to $6 per ton on transportation costs. These savings are crucial for Vale given declining iron ore prices and increased competition from its Australian peers.
Impact on dry bulk shipping
Now, Vale will start its direct onshore distribution base in China rather than having offshore bases in the Philippines and Malaysia. This will make redundant the current Newcastlemax vessels employed to deliver cargoes from offshore bases to China. The long-haul transportation was in any case done by the Valemaxes. So the net negative impact on the Capesize rates shouldn’t be significant.
The lifting of the ban might, however, encourage Vale to build more Valemaxes, adding to its current fleet of 55. Vale is also increasing its iron ore capacity by 90 million tons per year by 2017. The positive impact of capacity additions will not be felt by vessels currently operating in the market because Valemaxes will be used to transport these additions. This could be negative for dry bulk shippers including Diana Shipping (DSX), Navios Holdings (NM), and DryShips (DRYS). It’s also negative for the Guggenheim Shipping ETF (SEA). NM forms 1.9% of SEA’s holdings.
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