China lifts ban on Valemax cargo ships but questions surround an ailing industry

It seems that Brazil’s Vale and the Chinese government have decided to declare a truce. According to several publications, the Chinese government officially lifted a 3-year ban on Valemax class ships by allowing dry bulk cargo ships of 400,000 dwt capacity to dock at Chinese ports.

Too little, too late? Maybe, particularly as China’s economy is slowing and thus demand for iron ore seems to be following a similar path. However, China remains the world’s largest consumer of iron ore, the main ingredient for steel making. Some 85% of that consumption relies on imports from Australia and Brazil.

China’s China Ocean Shipping Group (Cosco) and the China Shipowners’ Association reportedly favored the ban by noting that Vale’s vessels were not safe for ports to handle.

So, as a result, for the past three years, Brazil’s large mining company, Vale, has had to work around the ban by transferring ore to smaller ships in its floating stations in the Philippines and the Teluk Rubiah Distribution Center in Malaysia.

However, Vale, Cosco and China Merchants Energy Shipping came to a 25-year agreement in which the two Chinese companies would carry iron ore imports into China on behalf of Vale and in return, Cosco and China Merchants agreed to build ten additional Valemax ships. A few months after those agreements, China’s government then issued its revision.

Analysts note that this may be good news for the likes of Cosco and China Merchants, but actually it is bad news for the dry bulk shipping market as a whole. With no signs of attempts to correct the balance of vessels with demand, the Baltic Dry Index will continue to suffer as rates are already now hovering at almost 30-year lows. This in turn could additionally put the mining industry in a precarious position.

Meanwhile, don’t expect Australia to take this latest development lightly. Australian mining companies will likely follow suit to secure market share in China. If so, this should benefit Chinese carriers but as mentioned previously, it will exacerbate an industry issue that shows no signs of improvements. Furthermore, how will smaller vessels fare? For three years, these vessels appear to have thrived thanks to Vale’s floating stations. Will they be able to continue to compete effectively?