Capes keep momentum on Brazilian iron ore demand

Capesize spot rates have been trading above $20,000 per day for five weeks. The strength is expected to continue into the fourth quarter of the year as demand for higher quality iron ore from China and Japan assists long-haul trades.

News ID: 80158

Date: 08 August 2018 - 09:34

Higher steel prices encourage the use of better quality iron ore sourced from Brazil, adding to tonne miles

THE capesize sector is maintaining its momentum reaching the highest levels this year spurred on by renewed higher iron ore volumes coming out of Brazil, while the future is encouraging.

Brazil’s largest mining company Vale said it will be targeting iron ore output of more than 100m tonnes per quarter until the end of the year as its S11D operations continues to ramp up. Volumes for the first half of the year were lower than expected because of weather-related disruptions and a trucking strike in the country that delayed shipments.

Market participants had called for higher shipments from Brazil in the second half of 2018 to boost the capesize market, which had sunk to the lowest point of the year at $7,051 per day on April 5. Some were sceptical that the target would be met.

But, as Brazil exports greater volumes of iron ore, capesize earnings have rebounded, trading above $20,000 per day since July 3.

The average weighted time charter on the Baltic Exchange increased to $26,439 per day at the close on Tuesday from $25,698 on July 31. Earnings reached $27,283 per day on August 6, the highest point since mid-December.

According to Clarksons, the higher spot rates were mainly a reflection of an increase in activity on the Brazil to China route, with route rates rising to $24.48 per tonne from $19.67 at the end of June.

According to broker reports, Vale was booking vessels for late August and early September loading, while Polaris Shipping was in the market for a vessel to load from Tubarao during September 1-10.

The bookings are a sign of strong shipments to come from Brazil, which will be good for tonne miles, as the commodity is shipped mainly to China.

D’Amico Dry chief operating officer Benjamin Wilkes told Lloyd’s List the market will become stronger into the fourth quarter of the year as China and Japan continue to seek higher quality iron ore so that steel mills can maximise profits while steel prices are high.

The sentiment was echoed by JP Morgan.

“Capesize spot rates are shaping up to be in a good position going into”, the fourth quarter, said JP Morgan’s shipping analyst Noah Parquette.

“Fundamentals are generally positive, with Chinese steel margins hovering at near-term highs and iron ore port stockpiles falling for the past five weeks,” he said.

A Chinese government proposal is suggesting that a longer period of steel production cuts this winter should be implemented to help curb pollution, he added. It suggests that the output restrictions take effect on October 1 instead of November 15, and end on March 31, two weeks later than originally planned.

That could lead to increased “stockpiling ahead of the start date and/or higher output at lower emission mills”, Mr Parquette said, which will require more high-quality iron ore.

Arctic Securities is also bullish on the sector, raising its forecast of earnings to $30,000 per day in the fourth quarter. It expects an average of $24,000 per day in the third quarter.

“We have entered the peak season on a high note and by looking at previous seasons there could certainly be more to come,” it said in a note.

A flurry of short-term period charters have also been concluded, with eight contracts agreed since July 26, fixed between $20,000 and $28,000 per day, according to VesselsValue.

Last week, Diana Shipping managed to secure $24,000 per day for its Seattle capesize vessel from Koch for six months. That is more than double the previous charter.