China has confounded many analysts this year by taking in far more iron ore than predicted. Jason Jiang ponders what the future holds for dry bulk freight rates.
2017 looks likely to be a better year for dry bulk carriers, as an increase in trade and contracted supply is set to support a recovery in charter rates of major dry bulk shipping routes, and China will play a vital role for the recovery, analysts reckon.
“China has increased its imports of coal and iron ore, and it has helped boost the overall dry bulk market, its efforts to revive its economy have helped the iron ore trade to revive and are expected to further boost tonne-mile demand,” says Rahul Sharan, lead dry bulk analyst from Drewry.
China’s iron ore import is expected to grow moderately, by around 1% annually over next five years, Sharan reckons.
Drewry expects freight rates on the Brazil-China and Australia-China iron ore routes for capesize vessels to strengthen over the next two quarters, but the return of laid-up vessels to trading could disrupt the expected improvement.
“Dry bulk demand continues to beat expectations to the upside, driven primarily by strong Chinese imports. We estimate dry bulk ton-mile demand from China is up 10% y-o-y on an LTM basis, up from flat at the beginning of the year. Volume of iron ore is the chief driver (roughly 88% of Chinese dry bulk ton-miles comes from iron ore), although coal has reversed its drag on demand, and soybeans and bauxite also show good ton-mile trends. Nevertheless, the rate pickup has been almost entirely in the largest capesize vessels, which are heavily exposed to iron ore,” says Noah Parquette, vice president, global equity research at J.P. Morgan Securities.
“The growth in iron ore demand is being driven by volume, with Brazil and Australia both gaining market share from the rest of the market, and also from domestic production. Steel mill profitability remains robust, and port stockpiles have not built significantly, so we should continue to see solid levels of demand in Q4,” Parquette adds.
According to a recent dry bulk report by Alphabulk, China is on course to import more than 1bn tons of iron ore for the first time ever this calendar year, after a surprise spike in steel demand and a move towards higher-quality ore pushed buyers back into the international market.
“Iron ore shipments from Brazil to China grew by 24% to reach 98m tonnes in 1H16, year on year. Such a development used to mean much higher freight rates, but spot rates for capesize ships were only modestly buoyed by volume growth on this trade,” says Peter Sand, chief shipping analyst at BIMCO.
BIMCO believes that a significant part of the iron ore has been transported on Vale’s ‘conveyor belt’ of Chinese-owned VLOCs. Should this continue to remove cargoes from the open market, volume growth on the trade once the greatest driver of freight rates in the spot market will no longer affect the spot market significantly.
China’s iron ore imports in September increased 8% year-on-year to 92.99m tons, the highest level this year and the second highest on record. The cumulative imports over the past twelve months have already topped 1.017bn tons, an increase of nearly 10% on the preceding twelve months. The trend is almost certain to be repeated in calendar 2016 given the result so far in 2016: nearly 763m tons in the first nine months of the year.
“There are doubts whether China can digest so much iron ore, particularly as port inventories have increased over 20% from a year earlier. Such fundamentals suggest it is unlikely iron ore prices will exceed $60/ton for the rest of the year,” the Alphabulk report says.