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Once massive ships are allowed into mainland ports, shipyards could see big orders for them, analysts say
Keith Wallis
15 May 2012
Mainland shipyards could see a raft of new orders for the massive vessels known as very large ore carriers (VLOCs) once domestic authorities resolve regulatory and other issues, a senior shipping analyst has said.
Jon Windham, Asian maritime analyst at Barclays Bank in Hong Kong, estimated that VLOCs were up to 30 per cent more fuel-efficient per tonne of iron ore than traditional Capesize vessels.
VLOCs carry up to 400,000 tonnes of ore, while Capesize ships typically carry 160,000 to 170,000 tonnes. Shipbrokers say VLOCs consume 103 to 111 tonnes of fuel a day, while a Capesize ship uses about 70 tonnes of fuel, although the next generation of Capesize ships will use about 50 tonnes.
“Dry bulk from Brazil to China is the longest major cargo route. Each VLOC saves roughly US$6.2 million in fuel cost per year at current fuel prices,” Windham said. “If the efficiency gains prove accurate, it might push another round of ordering, which the shipyards badly need.”
Vale, the Brazilian commodities giant, ordered 12 VLOCs, capable of carrying 400,000 tonnes of iron ore, from China Rongsheng Heavy Industries in 2008 at a total cost of about US$1.6 billion.
Seven similar sized ships were ordered from South Korea’s Daewoo Shipbuilding and Marine Engineering, while Vale has taken a further 16 VLOCs and Capesize vessels on long-term charter.
But the mega ships are prevented from calling at mainland ports owing to safety concerns, although the moratorium was issued after the China Shipowners’ Association complained Vale ordered the ships to control the cost of freight and the cost of transporting iron ore.
But there are indications the port ban could be lifted soon.
Windham said: “We think the licensing issues will get sorted out very soon, as the ramp-up in vessel deliveries puts pressure on all sides. Why? Because shipping employs very few Chinese workers, while many more work in the shipbuilding, steel and construction industries.
“We think, to be blunt, fighting these vessels from entering China is detrimental to overall near-term and long-term Chinese interests. Vale still wants the vessels, and maybe more.”
China Rongsheng is the only mainland shipyard building 400,000 deadweight tonne (dwt) ore carriers, although CSSC Guangzhou Longxue Shipbuilding, close to Shenzhen’s international airport, has built 230,000 dwt carriers for mainland shipping companies.
Shipbrokers said the 400,000 dwt ships were ordered at the top of the market at about US$135 million each. But the price of a new, similar-sized vessel, which should also feature the latest fuel-efficient engine, hull and propulsion design, would be about US$60-70 million. By comparison, a fuel-efficient 180,000 dwt Capesize ship, consuming 50 tonnes of fuel a day, would cost US$40-45 million.
In an interview with the South China Morning Post last year, China Rongsheng chief executive Chen Qiang indicated preliminary talks had taken place with Vale about the possibility of further orders.
Windham estimated that the fuel savings equated to US$4 per tonne of incremental profit for South American commodity exporters. He said freight rates account for 15 per cent of the total cost of shipment, while fuel, which would be paid for by charterers such as Vale, accounted for more than 70 per cent of the cost.
Martin Rowe, managing director of shipbrokers Clarksons Asia, said: “The case for ordering more of these behemoths, from an economist’s viewpoint, is pretty good.”
But he and other shipbrokers said prevailing iron ore prices were more important than the cost of freight, especially when current freight rates were close to bottom.
“Vale needs these VLOCs,” he said. “Chinese mills welcome Vale to use the VLOCs. It is the Chinese shipowners who are concerned about cargoes being controlled by Vale.”
Windham said there were competing interests over the mega bulk carriers: “We often hear that ‘China’ wants or doesn’t want the VLOCs. Our view is that there is no ‘one China’ on this issue; there are only competing interests. The majority of Chinese interests will benefit from the VLOCs, and they fit into the overall strategy to reduce the landed cost of commodities entering China.”
China Rongsheng has already delivered two of the ships, Vale China and Vale Dongjiakou, while a third, Vale Dalian, has been on sea trials.
Three other vessels have left dry dock and are being completed at the quayside, while two more are under construction in dry dock. The Vale China was to be delivered more than a year ago but was handed over more than six months late in November. The second ship was also delayed.