ANALYSIS: Bulk freight market bolstered by iron ore’s shift into surplus

An increase in the chartering of Capesize vessels in July saw the dry-bulk freight market reach its highest point for 18 months.

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After years in the doldrums, analysts and market observers believe that the dry-bulk freight market may have turned a corner. New iron ore tonnages expected to come onto the market at the end of 2013 and into 2014 mean that volumes will outstrip carrying capacity.

Australian miners Rio Tinto and Fortescue Metals Group will put additional millions of tonnes from major Pilbara expansion plans onto the seaborne market from the fourth quarter of 2013.

Rio Tinto has plans in place to increase output from its Pilbara operations to 360 million tpy of iron ore, with the miner last month announcing the construction of a new mine as part of the ramp-up.

FMG plans to triple production in 2013, after reinstating plans to ramp up production to 155 million tpy at the end of last year.

Iron ore exports from Port Hedland, Australia’s main iron ore port, reached a record high of 23.33 million tonnes in May this year.

June and July saw monthly volumes edge down from May’s high, but year-on-year levels are still up by more than one-third as the Pilbara’s main export hub tackles additional tonnages from Western Australian expansion programmes.

Widespread increases
But it is not just the major miners that have contributed to the higher volumes of iron ore hitting the seaborne market in the past year.

Junior miners have also accounted for an uptick in iron ore cargoes on the freight market, with mid- and low-tier miners accounting for 30 million tonnes of annualised supply growth in December 2012, according to Australian investment bank Macquarie.

Booming export volumes from iron ore-rich Brazil have also helped to bolster the freight market.

Brazil exported 29.7 million tonnes of iron ore in July, according to Brazilian government figures. This was the largest monthly volume of iron ore shipped by the Latin American giant this year.

Elsewhere, West Africa’s emergence as an iron ore exporting hub has also boosted activity in the Atlantic, with ArcelorMittal’s mine in Liberia ramping up capacity and Sierra Leone-focused start-ups London Mining and African Minerals bedding themselves in as established regional producers.

A recovery in the Colombian coal market in the second quarter of 2013, following seasonal weather disruptions, also helped boost Atlantic dry-bulk rates.

“It was also a record quarter for Colombian coal shipments, although the Colombian coal strike has prompted recent weakness in the Atlantic market,” a Singapore-based freight broker said.

Rates rising
With new capacity coming online, cargo rates have started to rise.

Capesize voyage rates from Western Australia to China were quoted to Steel First at $8.65 per tonne and $20.40 per tonne from Brazil to China on Friday August 2.

Although preliminary trade data for June shows Chinese iron ore imports at a four-month low of 62.3 million tonnes, brokerage firm Simpson Spence & Young (SSY) said that this followed a seasonal pattern of monthly declines in June and remained 4 million tonnes above levels seen in 2012.

The seaborne dry-bulk trade, which includes iron ore, coal and grains, is expected to climb to more than 180 million tonnes in 2014 from projected full-year 2013 levels of 120 million tonnes, according to SSY.

Confidence has also come back into the freight paper market, with prices along the forward freight agreement (FFA) market’s forward curve pushing up strongly in the past week.

Fourth-quarter 2013 forward freight agreements reached levels of $17,000 per day on August 1, up by $2,000 from levels seen in mid-July.

Rebalancing the market?
Reports published by European think tanks in the past month have highlighted the effect of freight market dynamics on the iron ore market.

Wider availability of vessels could provide better access to new iron ore producing regions, the Centre for European Policy Studies argued in a paper published in July.

“Recent changes with the increase in capacity of the freight industry have stabilised costs of freight for some time, and ensure easy connectivity at the global level,” the think tank said.

“This may increase the accessibility of new regional areas to the global market and reduce space for an oligopolistic setting, as marginal costs become less predictable, so players can more easily defect to increase their profits,” it added.

Increased freight capacity has even driven some smaller producers to agree to non-profitable prices to win contracts, according to the think tank.

Vessel numbers
While more ships are being scrapped – and fewer new ships being delivered – now than at any point in the past five years, a wave of new orders for vessels has prompted concerns that the freight recovery may be short-lived.

“With the forward curve pushing massively into a contango for some time now, ship-owners are comfortable about putting in orders for new vessels,” a freight broker in London said.

“But you have to remember that ship-owners have a long-term outlook – they will need vessels regardless. A few new orders now doesn’t necessarily mean we’ll swing into overcapacity,” he added.

Whether dry-bulk rates will spike in the next year remains to be seen, but with iron ore producers relentlessly increasing capacity, it looks like the freight market may be out of the storm for now.