China Bans 400K DWT Large Iron Ore Carriers to Stop Brazil – COSCO Gains, Small Steel Makers, Ship Owners Suffer

Summary

China moved Feb. 1 to officially block access to its ports by large ore carriers, specifically the fleet of very large ore carriers owned by Brazilian mining company Vale. Beijing's goal is twofold: It wants to address vulnerabilities in its iron ore supply while also eliminating inefficiency in its steel and shipbuilding industries by enhancing larger companies' positions at the expense of smaller independents.

Analysis

China on Feb. 1 officially blocked access to its ports by cargo ships with capacities greater than 400,000 deadweight tonnes, saying Feb. 2 that the ban is specifically targeting very large ore carriers (VLOCs) owned by Brazilian mining company Vale.

China's desire for vertically integrated control over its raw materials supply -- iron ore, in this case -- may come at the cost of damaging the development of smaller Chinese firms. The move will push large carriers to Chinese Origin.

Working to contain iron ore suppliers' advantages -- for example, by blocking VLOC access to Chinese ports -- is one way Beijing is addressing these vulnerabilities in its supply chain. Now that the central government has officially blocked supercarrier access, Chinese shipowners and major steelmakers stand to gain, but small independent steelmakers may face further complications. Vale has already started up transshipment plans in the Philippines and Malaysia in order to gain access to Chinese ports with smaller vessels. Beijing, however, still wants domestic steelmakers to buy domestically produced iron ore at higher costs. This will inevitably increase the number of small firms pushed out of the market.

Another way China is addressing these vulnerabilities is by enhancing its domestic shipping industry. State-owned dry bulk carrier China Ocean Shipping Co. (COSCO) announced Dec. 7 that it would launch COSCO Bulk Carrier Co. Ltd. (CBC), a consolidation of its subsidiaries in Tianjin, Qingdao, Hong Kong and Shenzhen. The newly founded CBC will consist of 420 bulk carriers and a total of 40mn tonnes of capacity, an aggregation that allows COSCO to better coordinate and more efficiently compete with large shipping powers.

However, as slumping global freight rates are sustained, COSCO's consolidation effort comes as some Chinese shipping companies, particularly those operating small, private firms, are forced out of business and required to sell their vessels as scrap iron due to overcapacity in the industry. In allowing COSCO's enhancement, Beijing is promoting the further development of a national shipping champion over smaller ship-owning firms.

Chinese firms will continue to be dependent on the largest iron ore companies, though COSCO's CBC consolidation may further hamper Vale's attempts to control the shipping of iron ore and rework the supply chain dynamic to place China in a relative position of strength in freight movements. However, COSCOs intentions will certainly decrease the market share of smaller Chinese shipowners and force some out of the market. China's attempt to undermine Vale's plan is consistent with its hopes for some degree of control over all levels of the supply chain. Imports, particularly commodities, are slated to continue increasing trends in the long term, making shipping and leverage in the supply chain particularly important to Beijing. In its recent moves related to iron ore shipping, Beijing may also stand to gain from the pressure placed on the country's smaller steel-producing and ship-owning firms.