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Shipping Dispute Between China and Vale (NYSE:VALE) Not About Vessels


China-built ships not allowed in Chinese ports? Like a lot of things having to do with China, there's more to the story.



Since at least one third of Vale's new fleet has been constructed by Chinese shipbuilders, the country has already seen some profit from Vale's investment. Vale has retaliated by refusing delivery of three Valemax vessels completed by Rongsheng in April.

A month later, it appeared Beijing had finally yielded, sort of. It said it would take two to three years of construction at the port of Ningbo-Zhoushan to accommodate the ships and the construction would only start after "permission" from the government was received.

It shouldn't come as a surprise that China's most recent revision to (what appears to be) the highly volatile status of its ports' capacities has garnered a few doubts.

"I think there is great skepticism that [China's] ports can't handle Valemax ships today," Lax says. "I certainly don't think the Brazilians think that's the case. And I think that there's great skepticism in the mining industry and the commodity industry that that's the case."

Meanwhile, the price of iron ore has fallen over the past few months. In the Chinese spot market 62% iron (or Fe) content ore, an industry benchmark, hit its lowest levels in three years in September, at $86.70/ton due to a slowdown in steel manufacturing. A year earlier, it had been trading for $190/ton. It is currently slightly over $100/ton.

Australian iron ore is frequently under the standard, at 61% Fe content or lower while Brazilian iron ore is near 65% Fe content. In addition to its higher quality, Brazilian ore has fewer impurities. China's domestic iron ore ranges from less than 15% Fe to 40% Fe. It takes more energy and higher production costs to process the lower grades. In addition, lower grades cannot be used at all in metallurgical plants.
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