Bulker behemoths threat to Brazil-China capes spot market
The growing Valemax fleet could eventually dominate the Brazil-to-China iron ore trade and virtually take out the need for capesizes operating on the spot market
A potential fleet of up to 65 giant Valemax bulkers threatens to nearly eliminate the capesize spot market on the all-important Brazil-to-China route, according to one leading dry bulk market analyst.
Alphabulk has taken a close look at the impact of Valemaxes on the market in response to China's decision to allow the ships to trade into its ports and as shipping giants Cosco and Sinotrans are linked to orders for up to another 30 of the 400,000-dwt ships.
The news of an additional 30 Valemax newbuildings might well dampen the spirits of owners in the recovering dry bulk market, which has seen improved rates of close to $20,000 daily.
The impact of Valemaxes is significant given that Alphabulk estimates that China's decision to allow the behemoths to trade to its ports will already account for 0.6% of current capesize demand. In the current chronically oversupplied market, it describes the additional capacity as "untimely" and "unwanted".
The planned additional Valemax newbuildings, which are to be chartered out to Vale, could lift the fleet to 65 ships when they are eventually delivered.
With each Valemax having the potential to ship 1.6 million tons of iron ore annually on the Baltic Exchange C3 route between Tubarao and Qingdao, the whole fleet adds up to around just over 100 million tons annually of iron ore carrying capacity.
That represents 60% of the total trade volume of 180 million tons that Brazil exported to China last year. Alphabulk calculates the Valemax fleet would also account for around 25% of the total volumes of iron ore traded between Australia and Brazil and China.
Given the amount of dedicated ships already operating a shuttle service between Brazil and China there would be little room left for spot capacity, it suggests.
"If the Chinese iron ore market remains steady, and we factor in the existing long-term contracts of affreightment and other dedicated ships on the route, the industry could be facing a scenario where the spot portion of C3 becomes almost negligible," Alphabulk commented.
The strategy of using Valemaxes to dominate the trade would appear to fit in with China's aim to mitigate the risk of importing iron ore, in terms of freight rates and supply capacity, given its heavy reliance on Brazil for raw material imports.
Vale also appears to want to mimic the sort of long-term stability on the trade that characterises the LNG business, Alphabulk suggests. "Is the idea of Vale to build a gigantic floating conveyor belt between Brazil and China, removing trading volatility in the process?" the analyst questioned.
Yet there are problems with the trade becoming so reliant on long-term fixed Valemax business.
Firstly, C3 is a key market for setting capesize spot rates, as the Australia-to-China market has a high portion of long-term dedicated ships.
The lack of a spot market could also result in Vale paying more for its freight than it could have achieved on the spot market and, in effect, the miner would be subsidising the freight business to China.
"If the spot market was to stay where it is today for an extended period of time and if the Australian iron ore producers continue to add capacity, then Vale will have to continue to subsidise its exports to China in order to stay in the race to supply iron ore to Chinese steel mills," Alphabulk said.
China has said it will allow Valemax bulkers to trade to four of its ports. These include Dagushan in Dalian, Caofeidian in Tangshan, Dongjiakou in Qingdao and Ningbo-Zhoushan.
Alphabulk estimates a $650m to $850m investment has been ploughed into the Chinese port infrastructure to allow the terminals to accept the ships.
Alphabulk Team