Iron ore demand revival pushes up freight rates

By Sarbani Haldar

June 16, 2009: Freight rates for the movement of dry cargo improved significantly in May, thanks to the improved demand for iron ore and a mad frenzy of leading iron ore companies to fix vessels. Major congestion at the Chinese ports also contributed to the significant increase in the rates at the fag end of the month which also saw the Baltic Dry Index make a strong recovery.

China continued its import activities throughout the month. The Capesize sector saw some slowdown initially owing to the holiday season in Europe, it picked up considerably later as congestion at the Chinese ports peaked.

The freight rates improved gradually during the month. In the Brazil to China route for transporting 160,000 tons of iron ore from Ponta da Madeira, Brazil to Qingdao, China the freight rate was $35.00 per ton for a laycan scheduled for June 10 to June 15, as per a recent Tex Report. A month earlier in the same route the freight rate for 160,000 tons of iron ore from Tubarão, Brazil to Qingdao, China the freight rate was $19 per ton for a laycan scheduled for April 20 to April 30.

Similarly in the Western Australia to China route the freight rates have improved. According to the recent Tex Report for transporting 160,000 tons of iron ore in a capesize vessel from Dampier, Western Australia to Qingdao, China the freight rate was $13.35 per ton for a laycan schedule for June 3 to June 12. Earlier in the same route to transport 150,000 tons of iron ore from Dampier, Western Australia for transport to Qingdao, China the freight rate was $7.05 per ton for a laycan scheduled for May 15 to May 25.

The month began on a low note due to the holiday season in Europe, which led to a slowdown in the capesize market. However, with improving sentiments, and improved demand for both steel as well as commodities, rates improved in the coming days. Besides with infrastructure activities in China picking up, it is likely to benefit both the Capesize as well as Pacific panamax rates in the coming weeks as well.

Throughout the month, the big three iron ore producers of Rio Tinto, Vale and BHP Billiton have continued to rapidly fix vessels as they did in the last two months. In the meantime, China is likely to continue to ship more coal in the coming days as reports claim that the country plans to build four to six coal stockpiling facilities each capable of holding 20 million tons of the fuel in the eastern province of Shadong. The surge in coal imports would continue to rise with China's infrastructure spending picking up and as the country continues to stock well in advance before winters.

Around the middle of the month, the sector benefited from the transportation of petroleum coke. Coal shipments from Indonesia to India boosted supramax and handymax in the immediate term and more ships continue to be fixed for cargoes. Panamax rates have also benefited from the surge in demand for North Atlantic minerals. Cargoes like pig iron were being shipped to the US Gulf and there were plenty of iron ore cargoes being exported to the Far East, which have pushed up rates. In addition, increase in shipment activity in the China to India route has pulled up rates as ore continue to be shipped from India. Further, there are coal cargoes going to other Asian markets other than China, together with other cargoes which are pulling up rates.

But it was again the congestion at the Chinese ports which resulted in the shortage of Capesize vessels pulling up the rates. With the country continuing to consume iron ore, ore inventories at the different Chinese ports continue to increase. As per information, iron ore inventories at different ports are more than 71 million tons. Though the steel inventories have come down a bit, iron ore inventories are unlikely to come down soon as there are as many as 80 Capesize vessels waiting to offload stocks at different ports, as per reports. Stocks at China's two largest ports in the eastern province of Shandong are close to maximum capacity.

There is also a shortage of vessels in the Atlantic region. Thus, the rate to charter a Capesize bulk carrier to transport iron ore from Brazil to Asia went up to $90,000 per day at the end of the month.

While congestion at ports and record demand for cheaper iron ore from Australia and Brazil have given the much needed support to the once ailing rates, yet this sharp surge is unlikely to be sustained as rates would ease once congestion decreases. But with Rio Tinto agreeing to a 33 percent contract price cut with Nippon Steel of Japan, coupled with cost competitiveness of the higher quality iron ore imports, are likely to provide a positive support for the dry bulk shipping market in the coming days.

Baltic Dry Index

Unlike the previous months the Baltic Dry Index was able to maintain its uptrend throughout May. Improved demand for iron ore and chartering activities contributed to the significant increase, with the Index making its most remarkable recovery since the economic downturn surpassing the 3000 mark by the end of May. The Index reached the highest for the month on 3,494 points on May 29 after beginning the month on 1806 points on May 1.

However, it was the Baltic Capesize Index (BCI) which stole the show. The Index which had been recovering from the low levels increased by leaps and bounds by the end of May as it recorded 6125 points on May 29.

Both the Panamax as well as the Supramax Index also improved significantly during the month.

Source: Steel Insights