Dry - Brazil/China Capesize Iron Ore Rates Close in On Record High

Our news section is meant to highlight surprise global developments and their effects on the shipping markets.  For recent market developments, please check the Highlights page, which is updated on a monthly basis.

March 22, 2007

The dry bulk market has been subjected to remarkable changes in the first few months of 2007. Much of the recent buzz in the dry bulk market is due to increased  iron ore demand in Asia and severe Australian port congestion.

Last week a shortage of Atlantic tonnage pushed fronthaul Capesize rates through the USD 100,000/d barrier which also supported the Pacific market. It has been reported that a modern 175,000 dwt vessel achieved USD 102,000/d for a fronthaul trip on lucrative Brazil/China cargoes. One of the major factors behind the firm freight market today is due to port congestion, especially in Australia.

The West Coast of Australia was recently hit by two tropical cyclones which forced a temporary closure of Dampier,  Port Hedland and Port Walcott. This sudden incident increased the queuing at coal or iron ore terminals. As a consequence, approximately 145 bulkers are waiting in Australia, of which 90 are Capesizes, representing 13% of the Capesize fleet. About 6% of the total Panamax fleet, or roughly 80 vessels, is delayed by the queue.

Even though the queue outside the West Coast of Australia is likely to be short-term, the SSY Australian Coal Port Congestion Index reports that the average berthing delays at all coal ports in Australia has climbed to a record of 20 days. The worst congestion problems are however in the large coal export terminals of New South Wales and Queensland. Last week, the average waiting time surpassed 22 days in the Port of Newcastle.  In order to reduce and manage the large queue that has subsequently reformed, the Newcastle port operator, PWCS will introduce a new and revised tonnage quota system (Capacity Balancing System) from April 1.  

The system was originally granted by the ACCC in 2005 to last until 31 December 2007, but in September 2006, Hunter Valley coal producers voted to switch off the system for 2007. Nevertheless, even with the immediate re-introduction of the system, it could take until July to reduce the vessel queue to a more workable length of around 20 vessels.

Another element behind the dry bulk frenzy is the newly implemented Indian export duty on iron ore. On March 1 the Indian government levied export duty on iron ore at 300 Rs a tonne (6.77 USD/t). The intention behind this new tax is to restrict iron ore exports and conserve scarce national resources, and as the India Iron & Steel Association stated: “this is the first step to cut all iron ore within five years from India“. A group of Chinese importers has agreed to temporarily boycott iron ore from India, and among these are China Sinosteel, the second largest iron ore importer in China.

On top of this, on Monday the 19^th, The Indian Steel Alliance (ISA) suggested to double the export duty to 600 Rs/t as it is felt that the current levy is inadequate to check overseas sales and the miners are still making profits. It remains to be seen whether or not this suggestion will be authorized.

As approximately 85% of all iron ore exported from India goes to China, the decrease in Indian iron ore exports will likely cause a change in the pattern of trade. Importers need to seek cargo from other sources. The effects of this change in trade pattern have among others led to an increase in port congestion in Brazil, bumping the queue up to 10 days in most loading ports, from only a few days two weeks ago.

Due to strong energy demand, China became a net steam coal importer in Jan-Feb.07 for the first time.  In order to secure its prosperous power coal demand, China has cut its coal export quota to 42mt from 64mt in 2006. If fully implemented importers of steam coal from China will have to look for other sources of supply. Indonesia and Australia are likely replacements. Clearly this will change the trading patterns and increase tonne-mile demand.

The National Development and Reform Commission (NDRC) reported today that China will cancel tax rebates on exports of most steel products this year (from 8%), while several high-value added steel products will have their tax rebate cut to 5%. It has not yet been decided when to implement the new policy.

All these changes have occurred since our last market update and will clearly impact the market outlook over the short and medium term.

We are also concerned by the long term market effects based on the recent surge in ordering.  The orderbook for dry bulk vessels has jumped from 89 mdwt in January to 99 mdwt in mid March (1138 ships vs 1255 ships).

The graph to the right illustrates the potential effects on the average of the 4 T/C routes for the Baltic Cape Index. Recent changes in the market as mentioned in the text above have been taken into account. During the next two years, these changes should result in higher rates than we projected in February. The drop in 2007 Q3 illustrates the effects the re-introduction of the tonnage quota system in Newcastle probably will cause. However, if the system fails then rates are likely to stay at a higher level as we move towards 2008.

These developments will be covered in more detail in our next monthly release, which should be available during the final week of March.