Vale’s maxiships to hit China – bad news for FMG

As the iron ore price continues to hover just above US$60 per tonne close to a six year low, there is more bad news looming for Australian iron ore producers. China is preparing to finally allow the largest iron ore  carriers ever built called maxiships  into their ports. Operated by Brazil’s Vale SA, the world’s second largest producer of the mineral after Rio Tinto, the green light from Beijing means the South American company is finally competitive on shipping costs.

“The Ministry of Transport recently issued a circular setting standards for cargo ships with a capacity of 400,000 tons, a person with knowledge of the matter says, prompting speculation the government will allow Vale SA’s large vessels to dock in China,” respected Chinese business publication Caixin said.

“A Caixin reporter has also seen the circular, which was not released to the public. The standards set a ship’s maximum length at 362 meters, width at 65.6 meters and height at 30.5 meters. The amount of cargo is capped at 403,844 tons. The government set the standards so demand for larger vessels could be met, the circular says.”

“The specifications are almost the same as those for Vale’s large ships, the person with knowledge of the matter said.”

A frantic, wholesale cost slashing exercise is already underway at the world’s top four producers  (BHP Billiton is No.3 and FMG No. 4) as they race to stay below each other on the cost curve. Assets are being sweated like never before and while this will all come home to roost in a couple of years when a step up in capital requirements will be required all round for now it’s a fight to preserve what they can of their margins, and in FMG’s case to simply stay alive if the price falls any lower at all.

But no one yet looks like blinking in terms of production as the Chinese economy continues to pump out increasingly dire data. Shenhua Coal, China’s biggest producer said electricity production had gone backwards by 5% the day after inflation figures signalled that prices are heading backwards. Quite how this means GDP growth could possibly have been 7.3% last quarter is a question for the Party’s Central Propaganda Department’s scriptwriters.

The global commodities and energy rout has seen shipping costs slashed by up to 70% providing the only free kick of margin relief in sight for under-the-pump miners.

Australia has long held a cost advantage over its Brazil based rivals who have the edge on quality and therefore a price advantage. Now some of Australia’s shipping cost advantage will be chipped away at a time when high quality and low impurity ore is fetching increasingly good premiums. This will lead to more gnashing of teeth at company headquarters in Melbourne, London and Perth. In Canberra the Australian Treasury has, by now tossed its revenue forecasts in the trash.

The news came as ANZ was the latest bank whose research analyst marked down their iron ore forecasts – to US$58 per tonne as an average for 2015 and just another US$2 per tonne – US$60 for 2016.

As LRB has been saying for quite some time now – look out below.