After standoff, Vale and Cosco both claim shipping victory

[SHANGHAI] In the end, the answer to Brazilian miner Vale's Chinese shipping problem turned out to be in the problem itself.

For two years, Vale SA's Valemax mega-ships - designed to cut the costs of transporting iron ore to China - have not been allowed to dock at Chinese ports, stalling the miner's US$4 billion strategy. Behind the safety concerns blamed for the ban, industry insiders said the Chinese shipping industry, led by Cosco, lobbied hard to keep out the Brazilian ships.

But the argument is now moot because Vale on Friday announced a deal with Cosco, and analysts forecast the Valemax ships will soon be docking in China.

If they are right, it will mark a long-awaited breakthrough for Vale, allowing it to better compete with its Australian rivals.

Under the new deal, Vale agreed to sell and then lease back four of its mega-ships from Cosco, as well as committing to leasing 10 more vessels to be built by the Chinese company. The financials of the deal have not been released and it remains to be seen which side gave the most ground. But it does mark the end of a long fight that had become important for the two companies to resolve. Both can now claim victory.

With the price of iron ore now at five-year lows, the deal comes at a vital time for Vale. Without lower freight costs, it risks losing more market share to its Australian rivals, who are not only closer to China, but have also managed to increase production at a staggering rate over the past few years.

The Valemax is the world's biggest dry bulk vessel. If they were able to take cargoes directly to China, Vale would save about US$7 a tonne over current costs, closing the gap with the Australian iron ore producers. This will protect profits.

For Cosco, which offers services from shipbuilding to port operations through subsidiaries and its listed units, China Cosco and Cosco Corp, the deal is a successful defence of the domestic shipping industry against what it saw as the threat of a potential foreign monopoly.

The company controls over 800 vessels and one of the world's largest dry bulk fleets. Vale's mega-ships were a threat to this business even as it was already suffering from falling freight costs. Since reaching their peak in 2008, shipping prices have fallen 90 per cent. So industry insiders say Cosco lobbied hard, even though the Chinese economy stood to benefit from the Valemax ships. - Reuters