Chinese Shipper Says Do It Our Way

China’s state-owned shipping giant COSCO is again throwing its weight around, this time to the distress of Brazil.

COSCO may now have backed off from an earlier refusal to pay fees on long term bulk carrier charters because it was losing money thanks to a collapse in freight rates. That refusal created waves throughout the shipping and ship financing worlds. But it was not the end of COSCO’s efforts to manipulate global markets in its own interest.

Another, related move, has been to persuade the Dalian port, home to much of the COSCO fleet, to deny access to the giant 400,000-ton ore carrier recently delivered to the Brazilian mining giant Vale, which wants to use Dalian as an unloading and distribution base. The ship is the first of 30 so-called Chinamaxes to be delivered between now and 2013 to Vale, which decided to move into shipping on this scale to reduce the cost of delivering iron ore over long distances. It was particularly aimed at the China market because shipping costs put Vale and distant Brazil at a disadvantage compared with much closer Australian ore suppliers.

But COSCO obviously has little concern for free trade rules or indeed for the interests of Chinese ore consumers. It is worried that the arrival of the giant bulk carriers will add to the state-owned shipping line’s own chartering losses. The Baltic Exchange’s Dry Index, measuring average global freight costs for dry cargo, has fallen 30 percent already this year and could fall further as new ships arrive while demand may be stagnating.

COSCO is not the only ship owner upset with Vale. A spokesman for the Baltic and International Maritime Council (BIMCO) was quoted saying “we don’t need Vale’s ships,” noting that a large number of so-called Cape size bulk carriers in the 150,000 ton range were also coming to the market. One source says total bulk carrier fleet will grow 11 percent this year while demand is unlikely to increase by more than half that. But it is hard to see why Vale should not want to see ships big enough to reduce its costs, regardless of the problems of owners and charterers of smaller ships who themselves over-ordered.

Vale insists that it is not really interested in being a ship owner and has only entered the business to help sell its ore. Currently it produces about 300 million tons a year and has a 20 percent share of the China import market. But with production planned to expand to 500 million tons in four years Vale has seen the giant ships as its way to increase competitiveness. While for the time being ore prices are firm, big production increases are also in train in Australia, Africa and elsewhere. The cycle will turn from seller’s to buyer’s market.

It is hard to see how Vale’s ships can be kept out of global trade forever. But China may well be aiming to use its buying clout and ability to disbar these vessels to force Vale to sell the ships to COSCO and other Chinese shipping companies at a knockdown price. In the short run that might aggravate COSCO’s charter problems but in the longer run will give it more control of the bulk business. If it could use the Chinamax ships itself and land the cargo at Dalian it would make life doubly difficult for those who only have smaller ships.

The play over these ships is being watched closely, not just by China’s supposed close new BRIC friend Brazil but also by its third iron ore supplier India. While there is a no way India can accommodate such large vessels, it is becoming increasingly nervous about China’s commercial skills and particularly the use of state power, whether direct or via state-owned companies like COSCO to gain advantage regardless of whatever it may say about the merits of free trade and World Trade Organization rules. Brazil is particularly irate that COSCO has been so publicly opposing the building of ships which would, says Vale, cut shipping costs by 25 percent. So much for “new friends.”