Vale’s production cuts labelled a black swan moment for dry bulk shipping as BDI is chopped in half this year

Vale’s production cuts labelled a black swan moment for dry bulk shipping as BDI is chopped in half this year

Brazilian miner Vale declared force majeure yesterday on some iron ore contracts after a court-ordered halt to a mine following a deadly dam burst on January 25 which likely killed more than 300 people and has since been labelled as a “developing black swan story” for beleaguered dry bulk shipowners.

Vale has received a court order to temporary halt another 30m tonnes of iron ore production. This comes in addition to the 40m tonnes of production which is planned to be decommissioned due to the disastrous dam collapse in January.

“There is still a lot of uncertainty relating how much of Vale’s iron ore production will be affected, for how long, how much spare production capacity Vale has and how much iron ore inventories could be exported amidst temporary production cuts,” wrote Joakim Hannisdahl, head of research at Oslo-based Cleaves Securities in an update to clients yesterday. “What is certain,” he added, “is that this developing black swan story comes at a time when the dry bulk market is already facing seasonal headwinds relating to Chinese New Year / Golden Week (4-10 February), Australian cyclone season and Brazilian rainy season.”

Cleaves had earlier predicted that the initial 40m tonne iron ore production cut could remove 1.3% of dry bulk shipping demand from one of the most tonne-mile intensive trades in dry bulk shipping. Cleaves has since revised this to 2.3% taking into account the extra 30m tonne cut, shaving off $1,387 in its 2019 capesize daily earnings forecast to $20,037 per day.

The significant increase in iron ore prices will likely induce Australian suppliers to ramp up production, Cleaves predicted, but Chinese steel mills will likely demand less iron ore imports considering the higher prices, and rather continue to draw on inventories and increase scrap steel input.

In an update to clients, New York-based Commodore Research & Consultancy observed that last week, alone, global iron ore prices jumped week-on-week by approximately 13%. Steel prices during the same period remained basically steady. Now, though, iron ore prices are likely to rise even further, Commodore Research is predicting.

“This great divergence of iron ore prices compared with steel prices is putting significant pressure on steel mill margins and is also helping to make iron ore currently stockpiled in China and elsewhere more attractive compared to new seaborne cargoes. This issue, along with the very fact that overall Brazilian iron ore production is now most likely to contract this year … are negative issues for the dry bulk market,” Commodore Research noted.

Speaking exclusively with Splash today, Landsberg warned: “For several months now, and well before the Vale fiasco, we have been of the view that there has been a very real chance that dry bulk fleet growth in 2019 would exceed global economic growth. The Vale fiasco has now only increased this likelihood. This loss of iron ore production has only added to a long list of troubling global economic issues that have been evident to us and to some degree are still not getting enough attention.”

Peter Sand, chief shipping analyst at shipowning body Bimco, warned today as well as Brazil’s lower iron ore output, it was highly likely China would import less of the raw material in 2019.

The Baltic Dry Index could slip below 600 points today. The index closed on Tuesday at 629 points, down 51% since the start of the year.

Sam Chambers

Starting out with the Informa Group in 2000 in Hong Kong, Sam Chambers became editor of Maritime Asia magazine as well as East Asia Editor for the world’s oldest newspaper, Lloyd’s List. In 2005 he pursued a freelance career and wrote for a variety of titles including taking on the role of Asia Editor at Seatrade magazine and China correspondent for Supply Chain Asia. His work has also appeared in The Economist, The New York Times, The Sunday Times and The International Herald Tribune.

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