By Stephen Eisenhammer, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – Vale, the Brazilian mining giant and the world’s largest iron ore exporter, said Friday that it expected a resolution to the impasse surrounding the access of its giant vessels, known as the Valemax, to Chinese ports within the coming months.
The company’s Valemax, also referred to as very large ore carriers (VLOCs), which can carry 400,000 metric tons of iron ore, have been banned from entering Chinese ports since January on account of unspecified safety concerns. Chinese shipowners are reportedly reluctant to allow the giant vessels access, believing the ships will pose an unfair competitive advantage.
“We still haven’t got permission yet,” José Carlos Martins, Vale’s director for ferrous and strategy, said at a lunch with journalists in Rio de Janeiro, adding that he hoped a resolution would be reached in the coming months.
“Unfortunately we have encountered strong opposition from Chinese shipowners who don’t believe allowing the ships access is in their interests,” he added.
His comments came two days after Vale released a statement saying it had met with the Chinese Shipowners Association (CSOA) to discuss the dispute. Vale said it met CSOA with the “objective of exchanging ideas in regards to the rules about the docking of our VLOCs in Chinese ports,” but did not say when the meeting had taken place or if the groups had met more than once.
“Both parties share the same goal, that the ore arrives in China at the most competitive prices in order to benefit the Chinese economy,” the statement said.
Vale’s VLOCs are a vital part of the company’s business strategy, with the aim of reducing freight costs in order to compete with Australian iron ore giants, BHP Billiton and Rio Tinto, who are located closer to the lucrative Asian market. China is by far Vale’s biggest export destination, accounting for nearly fifty percent of its overall exports.
However, the impasse over access to Chinese ports has given a big knock to these plans and the US$4.2 billion investment to build 35 of these mega ships by 2013 is in danger of looking like a challenging strategy.
In order to save this investment Vale has opted to build a second floating transfer station in Subic Bay, Philippines. These stations, one of which has already been in operation since February, allow Vale to transfer iron ore from their VLOCs on to smaller vessels which are able to access Chinese ports. Vale says this system still reduces costs compared to using smaller ships for the entire Brazil to Asia journey.
The company is already facing a difficult period with banks more conservative in their lending and iron ore prices depressed on the back of the continuing economic crisis and fears of a Chinese economic slowdown.
Vale is also facing a number of disputes with the Brazilian state over taxes the company is said to owe following legislation that was passed in 2001 concerning profits from subsidiaries abroad. The total taxes amount to R$34 billion (US$16.7 billion) and would seriously hamper Vale’s investment plans especially given current conservative bank attitudes to lending.
On Friday, Vale CEO Murilo Ferreira said he was confident that the Supreme Court understood the gravity of the potential situation, were the taxes to be reclaimed immediately and in full. Vale continues to argue that the taxes that are being demanded go against double taxation law, as Vale has already paid taxes on the profits in the countries were the business was originally done.