A ruptured hull in the world's largest dry bulk ship could sink Vale's multi-billion dollar plan for a flotilla of giant vessels to link its iron ore mines to the mills of top steelmaker China.

The two-month-old Vale Beijing was severely damaged this week while preparing to set sail on its maiden voyage, sparking concerns over the safety of the Valemax vessels.

Influential Chinese ship owners and steelmakers fear the fleet is a Trojan Horse which Vale will use to monopolize both the shipping and iron ore markets at their expense. The accident will give them more ammunition as they lobby to keep the vessels out of China's ports.

If Beijing continues to keep its ports closed to the Valemaxes, the company will have to rely on a costlier system of supplying the world's biggest iron ore consumer. That will involve employing more vessels, more workers and paying for upgrades to port facilities.

This accident really does delay things. I don't think the Chinese port authorities will decide any time soon since they have to check on the safety of the ships now, said a Beijing-based official with a major Chinese shipping firm, who declined to be named because of the sensitivity of the matter.

Vale was surprised by Beijing's opposition, since Chinese banks financed many of the vessels to be built by Chinese shipyards, such as China Rongsheng Heavy Industries Group <1101.HK> and Bohai Shipbuilding Heavy Industry.

Vale, the world's largest iron ore exporter, is spending more than $2 billion on the fleet of 400,000-tonnes carriers to cut the cost of shipping the steelmaking ingredient to China, which consumes around 1 billion tons of the commodity a year.

Not one of the six vessels on the water has made it to Vale's top market, as China has yet to approve of them.

Valemaxes could give the miner complete monopolization of the iron ore supply to China, said an iron ore official in northern China, echoing the complaints of several steelmakers.

And all the money that is saved by Vale will go to its own pocket, while Chinese steel mills won't be able to get any benefit at all.

Arthur Bowring, managing director of the Hong Kong Shipowners Association, believes the Valemaxes will eventually make it to China, but only after the Brazilian firm wins over the authorities.

To make this happen, there has to be political acceptance, whether local, provincial or regional. While freight rates are low, there is not too much reason for that acceptance to be hurried along, he said.


Vale tried to win the support of the country's top shipping conglomerate, China Ocean Shipping Co (COSCO Group), as early as last year by inviting the state-run company to form a joint venture for managing the ships and sharing the profits.

COSCO's then-president, Wei Jiafu, said he rejected the idea and used his influence as head of China's Shipowners Association to start a vocal campaign against Vale's vessels.

Wei lobbied China's powerful economic planning and price-setting agency, the National Development and Reform Commission (NDRC), as well as the Ministry of Transportation.

So far, both state bodies appear to be listening to the industry group.

In order to protect our shipping, steel and shipbuilding industries, the association will lobby all relevant authorities to block Valemaxes from accessing China's ports, Zhang Shouguo, the association's executive vice chairman, told Reuters.

With us facing a gloomy economic outlook, combined with the huge overhang of vessels, there is no incentive to make such heavy investments to build a 400,000-tonne terminal, waterway or any relevant facilities.

The competition from Vale's fleet could not have come at a worse time for Chinese shipowners, already struggling with a severe downturn in the industry driven by rock bottom freight rates, high bunker fuel prices and an oversupply of ships.

Things got so bad that COSCO Holdings <1919.HK> <601919.SS> and Grand China Logistics, a unit of HNA Group, were forced to temporarily halt payments to foreign ship owners earlier this year to renegotiate better terms.

Vale's gigantic fleet is choking off any hopes for a recovery in the market, analysts say, something that Chinese shipowners are unlikely to forgive.

Vale has offered to sell or lease the fleet as it looks to appease foreign shipowners. The Brazilian mining giant did not want to be a major freight operator or profit from its shipping business, a company official said, but wanted to shield itself from volatile freight costs.


Chinese steelmakers buy two-thirds of global seaborne iron ore -- nearly all from the Brazilian miner and Australia's BHP Billiton and Rio Tinto -- and Vale's desire for freight rate stability has left them feeling insecure.

China's biggest steelmakers fear that if Vale gained increased control over the supply chain with the ships, it would have another advantage when negotiating the price of iron ore.

Large-sized steel mills are more concerned over Vale's fleet as they have long-term contracts, while smaller steel mills would be less affected as they often resort to the spot market, said the iron ore official in northern China.

The strong Chinese oppositions has complicated Vale's plans for the fleet from the start.

Its first mega bulk vessel, Vale Brasil, was forced to turn around in the Indian Ocean on its maiden voyage in June after the Chinese government failed to provide permission for the ship to dock at Dalian Port. It went to Taranto, Italy, instead.

Vale has said the ship was rerouted for commercial, not political, reasons and to allow more time to finalize talks for future port deals.

Several industry sources in China and Hong Kong, however, believe that Beijing stepped in at the last minute to cancel the shipment, succumbing to industry pressure.

I don't think it was the MSA (China's Maritime Safety Administration). The decision was made at a much higher level, said a senior industry official, who declined to be named because he was not authorized to speak to the media.

NDRC is responsible for all the general planning for all of these things, so yes they are most likely behind it.


Vale said it expected China to allow the ships into port once it resolves a few operational problems, echoing comments made by an NDRC official last month.

Industry officials, however, say these fixes were being held up by the maritime authorities and the government in Beijing.

Vale acknowledges it will take time to enter China, but stands by its ships. It was definitely not a mistake, said Jose Carlos Martins, the company's executive director of iron ore and strategy at a news conference in London this week.

I think it is a question of time, and these vessels will be very much used on this route from Brazil to Asia.

He would not speculate how long it will take.

Asia is expected to receive its first fully loaded Valemax, the Berge Everest, in Singapore on December 15, according to Reuters Freight Views. It isn't clear yet where its final destination will be, but no one believes it will be China.

(Additional reporting by Alison Leung in Hong Kong, Manolo Serapio Jr. in Singapore, Silvia Antonioli, Jonathan Saul, Clara Ferreira-Marques and Jackie Cowhig in London; editing by Miral Fahmy)