Brazilian iron ore producer Vale is facing up to a new challenge as hull cracks were found on a third converted very large ore carrier (VLOC) ship it has on charter and the viability of the vessel class came under scrutiny.
But, should Vale lose faith in the VLOC fleet, the repercussions will boom throughout the market.
VLOC scenario:
So, what’s a VLOC when it’s at home? The Stellar Daisy, Stellar Unicorn, and Stellar Queen are three of 50 vessels that started life as single-hulled tankers carrying crude oil. Several high profile spillages led to single-hulled tankers being phased out in 2005-10 in favour of more secure double-hulled tankers. But many of the single-hulled tankers were relatively young and shipowners were reluctant to scrap them and lose a revenue stream. Some were converted to double-hulled tankers, some of floating storage units, and 50 were converted to bulk carriers — VLOCs.
Parts sealed off:
Parts of the tanker were sealed off and turned into void spaces while the deck plating was changed and reinforced along the length of the hull with a myriad of other changes. These converted carriers are now coming up on their 25th year — the oldest that most dedicated dry bulk carriers would reach before being scrapped. The sinking of the Stellar Daisy and the problems discovered in the other vessels has also put owners and the Korean Register of Shipping, which carried out surveys on many of the ships, under scrutiny.
VLCC converts:
Polaris — owner of the Stellar Daisy and other very large crude carrier (VLCC) converts — has started checks and surveys on the vessels and found that the Stellar Hermes required reinforcement work. Caution may have led to similar work on the Stellar Cosmo although this has not been confirmed.
Vale has 50 VLOCs on the charter. Most were converted in the late 2000s and chartered from the owners on 10-year contracts to carry iron ore between Brazil and China. Others were hired by steel producers such as Baosteel. Some of Vale’s agreements were extended at lower rates when the freight market crashed in 2011-12, but the majority will start to expire from 2018. And this is when Vale has scheduled delivery of the first of 29 new Valemax ships — its second tranche after the 37 ships built in 2011-13.
Valemaxes usually have a deadweight tonnage of between 388,000dwt and 404,000dwt, whereas the converted VLCC vessels are between 260,000dwt and 310,000dwt, so each Valemax could carry around 75,000-100,000t more iron ore than a converted VLCC ship.
But the sinking of the Stellar Daisy with the presumed loss of 22 lives, along with the hull cracks found in the Stellar Unicorn and Stellar Queen are a concern for the iron ore producer. With the backwash from the Samarco dam collapse still making life uncomfortable, it is a concern the company could do without.
Significant choices:
So, Vale faces a significant choice. If it abandons the VLOCs, it will have 60mn t of iron ore — assuming four journeys a year carrying 300,000t ore for each ship — that it will have to charter spot market ships for until its Valemaxes start to be delivered in 2018-19. In addition, standard Capesize ships can probably only carry 150,000-180,000 t of material, so it will likely need two Capesize ships for every VLOC it stops using. If Vale stops using one VLOC, it will need to charter eight Capesize ships on the spot market over the course of the year, assuming four journeys per VLOC.
Active benefits:
Vale was more active than usual in the first quarter of 2017. It only charted about 30 ships between Brazil and China but this was sufficient to push rates from $10/t to $17/t — the highest since August 2015. An additional 10-20 fixture would drive rates significantly higher, especially if they came in the third or fourth quarters when the cost of freight usually peaks. Each dollar per tonne increase will cost Vale an additional $150,000 per voyage. But if rates averaged $5/t higher, which would not be unreasonable, and the company required 12 additional voyages — covering three VLOCs — it would cost an extra $7.5mn above current freight costs. Rates on the route have reached $25-30/t in previous years when spot volumes from Brazil were more significant.
The increase in fixing activity:
An increase in fixing activity on the Tubarao to Qingdao route usually has a far larger impact than an increase in the west Australia to Qingdao route — China’s principal iron ore artery. This is because vessels chartered from Brazil are usually out of the market for far longer. The journey between Tubarao and Qingdao take 54 days at 9 knots but a vessel can be out of the market for closer to 90 days including the turn time, loading and discharge times and the time is taken to reach the port.
A journey between west Australia and China, on the other hand, takes just 12 days port to port and keeps ships out of the spot market for around three weeks. This would mean that any one fixture between Brazil and China would put substantially more upwards pressure on the spot market and a rush in such fixtures could push the cost of freight higher by several dollars rather than the $1-2/t that the west Australian route might gain.
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Source: Argus Media
