Soaring Brazilian, Australian iron ore exports prompt capesize freight boom

A hike in August iron ore exports from Brazil and Australia has prompted a boom in freight rates, with average capesize earnings more than doubling in the past month.

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The daily cost of chartering a capesize vessel (170,000 tonnes), which are most commonly used to transport iron ore, soared to $29,674 on Wednesday September 11, up from just over $12,000 on August 12 (see chart below).

“We thought that rates would increase as we entered the third quarter, but not so fast and [not] by so much,” a freight broker said.

Brazil’s August iron ore exports totalled 31.16 million tonnes, up 13% year on year.

Shipments from Brazil to the European Union alone surged by more than 36% to reach 7.15 million tonnes of iron ore in August, up from 5.25 million tonnes a year ago. 

Rio Tinto shipped first ore from its expanded Pilbara operations earlier this month. 

Fortescue Metals Group and BHP Billiton have also ramped up iron ore output in the past three months.

“The doubling of cape[size] freight momentum has been driven by the addition of an estimated one capesize per day to demand from the various iron ore ramp-ups of the Pilbara together with improved shipment rates from Vale’s southern system mines in Brazil,” analysts at Standard Bank said in a note on Wednesday.

A slowdown in deliveries of new additions to the global bulk capesize fleet in August also helped boost rates, Standard Bank said.

“Fresh capesize  bulk fleet new build supplies fell to their second lowest for the year [in August], with only 0.7 million dwt capesize capacity delivered during the month. This equates to half the average 1.4 million dwt per /month of new capesizes delivered across the year,” the analysts said.

While short-term capsize freight rates have spiked, brokers said forward freight agreement levels into 2014 remained relatively immune to the price boom.

“People are not pricing the boom into next year,” the broker commented.

Fourth quarter 2013 swaps prices pushed above $28,000/day, while calendar year 2014 prices remain around $18,350/day.

As demand increases, vessels that have been on the go-slow and economising on fuel while rates are low, will speed up – effectively adding more capacity to the market.

“Vessels have slowed down a lot due to the cost of fuel,” the broker added. “If the market really takes off then the potential for vessels to speed up increases.”