Brazilian Miner Vale S.A (VALE) has planned to sell or lease its planned fleet of giant bulk carriers and is in talks with the Chinese and other ship owners on the issue.
Initially, the company planned to own a fleet of 19 dry bulk freighters in order to reduce shipping costs of freight operators for carrying iron ore from Brazil to the company’s major iron ore importer, China. The move was anticipated to drive down freight rates globally and hurt smaller maritime companies worldwide.
However, the decision for selling or leasing came in after the company’s first and the world's largest dry-bulk vessel iron ore carrier failed to gain access to Chinese ports and was forced to divert to Italy on its maiden voyage.
Vale has been hooked on intensified talks with the Chinese shipping companies since last month. Once the sale or lease issue reaches agreement, Vale will be signing a long-term contract with the shipowners to ensure that the ships will only be used to transport Vale's iron ore from Brazil to China and other regions.
The company anticipates that negotiation with the Chinese shipping companies will help them gain access to the Chinese ports with the relevant authorities. However, the mining giant also has also started negotiating for similar agreements with shipping companies other than the Asian giant, but declined to name the negotiating companies before finalization of the deal.
Vale introduced its first giant dry bulk freighter in May and currently owns 19 of 35 maxiships. The shipowners Bergsen, STX Pan Ocean and Oman Shipping own the remaining 16 and have signed a long-term chartering agreement with Vale. However, the deployment of the maxi ships is anticipated to weigh further on an already struggling freight market, wherein ship supply has outpaced demand reducing the dry bulk rates.
On the other hand, Vale estimated that the mega ships, which are being built by China Rongsheng and Korea's Daewoo Shipbuilding, will cut freight costs from Brazil to China by 20% to 25% and will significantly reduce carbon emissions compared with other vessels. Vale’s management expressed their view that the company wants to be a pioneer in the next generation of Chinese ships but is not interested in becoming the owner. Further, Vale will pay the freight price to the owners of the ships based on a cost plus return on investment basis.
Rio de Janeiro-based Vale S.A. is one of the world’s largest producers and exporters of iron ore and pellets. The company keeps improvising its competitiveness against rival companies like Rio Tinto plc (RIO) and BHP Billiton Ltd (BHP).
We currently maintain a long-term Neutral recommendation on the stock. Vale has a Zacks # 3 Rank, which translates into a short-term Hold rating (1-3 months).
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