‘Guaibamax’ plan adds up for Vale but what of the dry bulk market?

New capacity ought to help the miner without damaging the market, but shipowners should be wary at the sight of new scrubber-fitted VLOCs arriving

Vale will be hoping to strike it third time lucky with its new fleet of 47 so-called guaibamax bulkers after an eventful period for its high-profile dry cargo shipping investments.

The sight of the Brazilian miner's new 325,000-dwt vessels starting to arrive into a finally improving freight market may be less welcome for rival independent shipowners, although they are not running scared just yet.

"In strong quarters, it should not hamper the market. I believe the impact may be more seasonality rather than a significant drop in rates."
Shipowning executive

Vale’s first generation of 400,000-dwt Valemax bulkers were branded white elephants when they were banned from entering China in 2011.

While the political bridge between Brazil and Beijing was eventually crossed, the first two Valemax generations have not been a financial success.

The ships were constructed to help Vale keep its freight rates stable. But its bespoke fleet has consistently carried a higher cost of freight than spot market tonnage from Brazil to China since 2014, according to data from broker Braemar ACM.

The only times during that period when Vale has been paying less per tonne than the prevailing market was in late 2017 and this summer when spot earnings between Brazil and China reached four-year highs.

With cheaper freight being negotiated on the 47 scrubber-fitted guaibamax ships and the capesize market now pulling away from the trough, the economics are starting to look better for Vale. This should help it close the freight cost gap to its rivals.

The first of the new ships, the 325,000-dwt Sao Diana (built 2018), was delivered this July into a strong market which has been assisted by large volumes of iron ore being shipped by Vale from its native Brazil to China.

By the time the last of the series is handed over in 2023, Vale will control a fleet of 115 ore carriers built in 2011 or later, assuming no new ships are contracted in the interim.

321b1ad3664f34563410e3d25f8a4f1d John Michael Radziwill (left) of GoodBulk; Alexander Saverys of CMB at TradeWinds Shipowners Forum, Posidonia, Athens 2018 Photo: KENNY HICKEY

No alarms on extra capacity

Presently those in the market are not overly concerned about the additional capacity derailing a long-awaited recovery in capesize rates.

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Court Smith of VesselsValue says he has run the numbers and the total tonnage to be added "is not alarming at all".

However, some believe the ships may create more volatility, especially in weaker periods as Vale will increase the “base load” they can carry.

"In strong quarters it should not hamper the market," one shipowning executive said. "I believe impact may be more seasonality rather than a significant drop in rates."

The demand outlook is also positive, with Brazil’s high-quality iron ore sought after by Chinese steel mills as the Chinese government acts to cut pollution.

“Vale is bringing more volumes of high quality iron ore to the market in the next few years, a benefit to the capesize market. Some of this taken by Vale-controlled tonnage and some of this by other tonnage,” explained GoodBulk and C Transport Maritime (CTM) chief John Michael Radziwill.

At the same time new trade routes are emerging. With Vale’s ore carriers largely on dedicated routes, this leaves the rest of the capes to focus on a lot of other trade flows, such as coal and iron ore out of Canada, Northern Europe, the Black Sea, West Africa and Australia, Radziwill says. “There is no shortage of tons or routes,” he said.

Renewal in light of tragedy

The second guaibamax ship, the Sao Ebba, is set for delivery in November. Owners and analysts note the vessels have been contracted to replace the converted VLOCs in Vale’s hands.

Stellar Daisy tragedy throws converted VLOCs into spotlight

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The process was bought into focus following the tragic sinking of the 266,100-dwt Stellar Daisy (built 1993) in April last year.

One major shipowner active in the market told TradeWinds that the guaibamax and Valemaxes obviously have good carrying capacity but a number of overage and converted ore carriers will disappear in the next couple of years.

“In combination with expected increase of iron ore export out of Brazil owners should not be overly worried,” he said.

Radziwill says there are over 40 ore carriers over 260,000-dwt, representing 4% of the capesize fleet, which are over 20 years old. They are predominantly used by Vale and will be replaced by the new ships as part of its fleet renewal, he agrees.

ba26077b8a6798758085829b559a3369 The first generation of Valemaxes ran to 35 ships. Photo: Vale

Data from Braemar ACM indicates Vale is already showing a preference for younger vessels. It says capesize bulkers accounted for 500 of the 1,200 vessels loaded with iron ore out of Brazil this year.

The VLOCs converted from tankers between 2008 and 2012 accounted for just over 100 of the voyages, the shipbroker calculates.

“What is also apparent from studying the shipping statistics is the low average age of vessels being loaded,” Braemar ACM researchers said in a report.

“This is just 7.2 years across the regular vessel types, with the converted tanker vessels the significant outlier, with an average age of 24 years.”

The Valemax effect

In addition, Radziwill notes that due to Vale’s new vessel programme, traditional owners are reducing their exposure to capesizes, especially newbuildings which he sees as a positive development.

Guaibamaxes at a glance

  • Vale’s guaibamax bulker project runs to 47 ships of 325,000 dwt each.
  • They have been booked by shipowners at yards in China, South Korea and Japan.
  • Delivery is slated to take place up until 2023, with all ships fitted with scrubbers and LNG-ready to meet new emissions standards.
  • Vale says the chartered volumes of the guaibamax fleet will cover approximately 62 million tonnes of transportation capacity per year.
  • It says the ships represent an important achievement to cover, with competitive rates, its growing iron ore transportation needs.
  • They have been dubbed guaibamax as they are the largest size able to load at the Guaiba Island terminal at Sepetiba in Brazil.

"All in all, we think the capesize market will continue its trend towards more vessels in fewer hands which is not a bad thing," he said.

"The standard capesizes that make up the Baltic index will continue to play an important role in this market. And of course let’s not forget production increases on the horizon from the other big miners too."

Hostages of fortune

Over a longer period, more question marks exist around Vale’s vast VLOC investment, some believe.

Radziwill: 'We were right about the capesize market'

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“Nobody can tell you the market is strong,” one shipowner told TradeWinds. “If it improves substantially, how many of these ships can Vale put on the water and how quickly?” he asked.

Vale and its competitors are only interested in the cost per ton to ship iron ore and are keen to avoid a return to 2007 when they were “held hostage” by shipowners, he explained.

“Now China has accepted the larger ships and the politics is out of the way, Vale is seen as a partner for its shipyards and steel products,” the executive said. “Short term I’m not so concerned, but long term, sure it could have an impact.”

“The real question is how many of these things could they order and quickly now they have a uniform asset type and design.

"If that does not strike a chord with shipowners, then it should.”

A shorter version of this article was printed in the weekly edition of TradeWinds on 24 August.