China’s trade ministry recently banned Vale S.A‘s (VALE) 400.000-deadweight-ton “Valemax” vessels, along with other giant freighters and tankers, to protect Chinese ocean-freight industry.
Shipping rates have slashed by two-thirds since October, slashing revenue for ship-owners worldwide. As a protective measure, the Chinese trade industry’s move comes as check on the mining giant’s efforts to cut the cost of shipping iron ore to the Chinese market; thereby straining the country’s trade relations with Brazil.
China toppled United States to become Brazil’s largest trading partner in 2009. Since then Brazil is a vital source of the industrial raw materials and food needed to sustain the world’s second-largest economy.
However, with the recent global economic turmoil, China has already started sensing the anxiety of soaring world prices for soybeans, iron ore and other raw materials that has been pressurizing the country’s commodity importers and freighters. Hence, clashes between the world’s second-largest and sixth-largest economies have become evident- thronging around iron-ore, shoes, aircraft, toys, automobiles, pesticides, clothing industries — the latest being freights.
Brazilian Vale uses its low-cost shipment facility to compete with Australian miners BHP Billiton Ltd (BHP) and Rio Tinto plc (RIO), whose mines are closer to the biggest iron-ore consumer, China. These Valemax ships are large enough to hold three soccer or U.S. football fields end-to-end on their decks and provide cheap imports in comparison to Australian or even Chinese domestic importers.
Chinese Ship-owners Association and major steelmakers opined that such lower transport cost by Valemaxes, which has been carrying Chinese ore from the Asian-giants Portland to Brazil and back, could be a “Trojan horse”; creating a monopoly for themselves and impacting the Chinese freight industry thereby. The Association, thus, strongly revolted against such “unfair competition” and has been imposing continuous pressure on Vale to “immediately stop” building its fleet in Chinese Portland.
Moreover, Chinese maritime regulations require ship-owners, or representatives, to cooperate with customs when applying for special entry permits as a safety issue for all ships plying in or out. In November, a Valemax ship, named Vale Beijing, developed cracks in its hull while loading for its maiden voyage at a Vale port in Brazil. The ship was pulled from service. On this backdrop, the transport ministry decided to bar the mega-ships, which are linked to the maritime safety issues.
Maritime regulatory policies have already started showing signs of decay. Mention may be made of “The Berge Everest,” which was the first Valemax to visit a Chinese port. Vale and shipping company partners with long-term contracts are building 35 of the Valemax giants for an estimated $4.2 billion in Korean and Chinese shipyards. The shipping industry opines that the arrival of 388,000-deadweight-ton Berge Everest was probably a bureaucratic fluke, as no Chinese ports have regulatory approval to receive dry bulk carriers of more than 300,000 tonnes.
Vale is the world’s largest iron ore miner, accounting for more than a quarter of all seaborne trade in iron ore, the main ingredient in steel. China is the world’s largest steelmaker. China’s decision suggests that the tug of war between the two nations has not only strained their trading relation, but also exposed the difficulties of foreign firms doing business in the capitalist country, with the government owning large number of companies.
In 2008, Vale inked a contract with Rongsheng Shipbuilding and Heavy Industries of China to build 12 carriers valued at $1.6 billion and is counting on a fleet of 35 Valemaxes. The future of the contract looks bleak, though.
The current Zacks Consensus Estimate for the fourth quarter is $1.08, representing a year-over-year decrease of 3.77%. Estimates for the fiscal years 2011 and 2012 are $4.44 and $3.85, respectively, representing a year-over-year growth of 36.64% and a decline of 13.36%.
We currently maintain a long-term Neutral recommendation on the stock. Vale has a Zacks #3 Rank, which translates into a short-term Hold rating (1-3 months).
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