Brazil and China Fighting Their Own Trade Battle

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It would seem the US is far from the only country to find China a tough competitor when it comes to their exports, and just as tough a customer when it comes to their imports.

A Reuters series of articles explores Brazil’s trials with unfair steel exports from China and iron ore producer Vale’s experience with iron ore carriers being blocked from docking at Chinese ports. The news service states Brazil will impose an anti-dumping tariff of $743 per metric ton on steel pipes, according to the government’s foreign trade chamber. The levy, which will be valid for five years, will also be imposed retroactively for 90 days to prevent importers from stocking up on goods the government is investigating over possible dumping charges. The initial target is steel pipes used in Brazil’s oil and gas industry, which is booming following big hydrocarbon discoveries in recent years.

The tubular products market is not the only sector to be suffering from Chinese currency-subsidized competition. Industry grew only 0.2 percent in the second quarter, compared with overall economic growth of 0.8 percent from the previous quarter. Although consumer demand remains strong supported by high employment and rising wages industry is suffering from high levels of imports. Brazil is facing the twin evils of a strong domestic currency (the real has soared as foreign investment flowed into the booming South American economy over recent years and raw materials like iron ore have flowed out), and the Chinese renminbi having fallen along with its peg to the US dollar. In recent months the peg has been allowed to shift a little, offering some respite, but few would argue that the renminbi is not undervalued.

The Iron (Ore) Curtain

Playing hardball on the flip side, apparently state shipping companies in China have taken exception to Vale’s attempts at reducing the cost of shipping iron ore between Brazil and China by blocking Vale’s attempts to unload cargoes at Chinese ports. The firm has invested in 19 out of a total 35 maxi ships, built by shipyards China Rongsheng and Korea’s Daewoo Shipbuilding, to cut freight costs from Brazil to China by 20 to 25 percent.

China denied the record-breaking Vale Brazil, at 362 meters long the largest dry bulk carrier in the world, access to any Chinese ports and forced it to divert to Italy to unload as Chinese shipowners forced Chinese ports to support their position. The shipowners wanted guarantees the vessels would only be used for the Brazil-to-Asia iron ore route, not in competition elsewhere, where there is already a glut of bulk carriers.

Vale is reported to be looking to sell its 19 vessels, possibly to Bergsen, STX Pan Ocean and Oman Shipping (the other firms in the 35-vessel consortium) or most likely, according to Nigel Prentice of HSBC Shipping Services, to the Chinese themselves. If a deal is not struck, the Chinese could stonewall exports of iron ore indefinitely, although they may face a backlash from domestic steel mills who are already restricted in the number of major suppliers open to them. The likely outcome seems to be that some kind of discounted deal will be struck with one or more Chinese lines to take over the fleet, or take a shareholding in their control.

With ocean freight rates at near-historic lows, Vale seems sanguine at present, but what goes around comes around. The iron ore producer’s original concept of accessing lower freight costs by operating a fleet of super-carriers to allow them to compete more directly with closer Australian suppliers was a good one — but just because rates are low now does not mean they will remain low indefinitely.

–Stuart Burns

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