ContributionsDry Cargo

Owners have lost control of the cape spot market

Louis Dreyfus Armateur’s decision to exit the cape spot market has elicited much response. Chief correspondent Jason Jiang identifies the changing capesize landscape.

Last week, French shipowner Louis Dreyfus Armateur announced its decision to exit the capesize spot market, conceding that the sector has now become too firmly controlled by the world’s top miners. The news has raised questions – who controls the capesize spot market today and is it really the case that it is dominated by the mining giants?

Peter Sand, chief shipping analyst at BIMCO, reckons the capesize market is very much a spot market and and it is the world’s top miners and commodity traders that control the iron ore and coal cargoes.

“As the balance between the very large charterers and the often smaller owners is off, freight rate negotiations tend to be dominated by the top miners,” Sand says.

“Capesize spot still has a significant impact on the rest of the market, but these days, you see more often than just a few years ago, capesize spot going in another direction as compared to the rest of the market. The past six weeks is the latest example,” Sand observes.

Ralph Leszczynski, head of research at Banchero Costa, agrees that the limited cargo types and trading routes (in particular Australia-China and Brazil-China) in the capesize spot market makes large mining companies naturally command a strong position.

“The regularity of the trade means that a lot of the flow of iron ore and coal goes on long term contracts and on owned or time-chartered ships, leaving a relatively marginal role to the spot market, which is very volatile as charterers tend to resort to the spot market more when something goes wrong – they need to replace a ship which missed a laycan date, or there is a sudden unexpected increase in demand, rather than for regular day to day business,” Leszczynski says.

George Nordahl, dry cargo analyst at Affinity Research, is of the opinion that Louis Dreyfus Armateur has made a prudent medium to long term decision in exiting the cape spot market.

Nordahl has noticed that the influx of newcastlemax and VLOC tonnage, often controlled by the big miners, is flooding the market, offering more cost efficient capacity on many of the traditional routes previously dominated by the standard 180,000 dwt capesize vessels. He believes the capesize design is of lesser relevance in today’s Asia-centric market, where having the flexibility to trade in the Atlantic is less crucial.

“Currently 90 VLOCs and 50 newcastlemax vessels are on order, totalling 40.48m dwt. Considering a lot of these vessels, particularly the VLOCs which make up roughly 75% of that capacity, are backed by COAs to carry iron ore, it is hard to see a scenario where the existing capesize spot market benefits,” Nordahl maintains, adding that 72.2% of the existing capesize fleet is under 10 years old and the ability for a supply side compensation to offset the additional capacity from the larger vessels is also questionable.

“I would say that it is not the case that the big miners control the spot market as such, but their strategic decision to enter into long term COAs using VLOCs ordered for the purpose will most likely have a negative impact on spot rates as the vessels are delivered,” Nordahl says.

Maritime consultancy firm Maritime Strategies International (MSI) reckons the capesize exit is a smart play by Louis Dreyfus Armateur as MSI is a believer that due to structural market changes over the next five years, the global iron ore trade will peak in 2020 and subsequently fall, impacting the demand landscape for capesize ships operating in both basins, and market participants who buy into this view will need to rethink their strategy for operating in the capesize market before this happens.

“I would not say the dry bulk shipping market is controlled by anyone on the ship supply side,” argues Randy Giveans, vice president of equity research at Jefferies.

As an example, he says if Vale decides to pull back production or hold back exports, that would be very negative for dry bulk shipowners, and if the miners decide to export incremental cargoes, that would be positive.

In conclusion, Giveans reckons there is not much “control” by the ship owners/operators as they are price takers, but the same is true for pretty much any mover of a commodity.

Jason Jiang

Jason is one of the most prolific writers on the diverse China shipping & logistics industry and his access to the major maritime players with business in China has proved an invaluable source of exclusives. Having been working at Asia Shipping Media since inception, Jason is the chief correspondent of Splash and associate editor of Maritime CEO magazine. Previously he had written for a host of titles including Supply Chain Asia, Cargo Facts and Air Cargo Week.
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