11-07-2016

Shipping Q2 — dry bulk: Surge in demand supports freight rates

drybulk

Since the beginning of the second quarter of this year, the Capesize market has seen a resurgence in activity, which has resulted in steady freight rates. The key Port Hedland, Western Australia, to Qingdao, China, 170,000 mt iron route hit a year-to-date high of $4.95/wmt on June 8 after having breached the $4.30/wmt mark on June 1.

The Capesize front haul iron ore route from Tubarao in Brazil to Qingdao had the rate perking up from $7.30/wmt on May 11 to an average of $9.09/wmt for June.

The Capesize market has been boosted by a firming iron ore market with Chinese steel mills increasing their lifting from port stockpiles. The mills consumed around 800,000 mt of iron ore from port stockpiles during the last week of June, according to a report by Arrow Research, which was the largest weekly lifting from the port stock since end-February, when they had sucked up 1.88 million mt.

“There is significant buying interest, although they [buyers] have not made up their minds to buy,” a Singapore trader told S&P Global Platts at the start of Q3.

There is also the suggestion that the Chinese government would roll out initiatives to boost domestic steel consumption. “There is some talk the Chinese government may lower interest rates to stimulate spending and this is supporting a stronger iron ore market today,” a Shanghai trader said in early July.

Lower interest rates and looser credit would spur demand for seaborne tons, sources said. “It is now July, and banks have collected back their mid-year loans from their borrowers in June. Everybody believes more lending will be available, so people are willing to pay more to get the cargoes they want,” a steelmaker source said.

Capesize freight rates for a good part of June stayed stable while the freight derivative or forward freight agreement prices spiked with Capesize August paper trading a shade below $4,000 and the Q4 paper trading at the $9,000 levels. Some support is also coming in the form of slippages in the newbuilding deliveries of Capesize vessels.

Going forward, a key concern for shipowners would be the expected return of Capesize vessels sitting idle into the market with rates holding steady.

As of early July, there are around 27 Capesize vessels idling at various ports and anchorages around the world. Some 20 vessels are in cold lay-up, while seven ships are said to just idling temporarily.

CHINA, INDIA COAL DEMAND SPUR ASIA PANAMAX, SUPRAMAX MARKETS

The rush of thermal coal cargoes bound for China and India during Q2 has come as a surprise for market watchers. The winning vessel classes have been the Panamaxes, preferred for China-bound cargoes, and Supramaxes, mainly heading to India. Along with the increase in the coal cargo volumes, the handsome availability of grain stems from the South and North Atlantic markets has been lending good support for these vessels, according to industry sources.

The Panamax South Kalimantan to West Coast India 75,000 mt coal route hit the $5/mt mark for the first time this year on June 28. The South Kalimantan to East Coast India 50,000 mt coal route on the Supramax vessels touched $6/mt on June 13, a high for the year so far.

The pick-up in iron ore prices has translated into demand for moving metallurgical coal on the East Coast Australia to China 75,000 mt route. The rate on this route ticked up from the low-$6s/mt to $6.85/mt on June 30.

While coal stem volumes for Panamax and Supramax vessels in the Pacific market are fairly steady for the Supramax vessels, they are currently on the lookout for nickel ore cargoes out of the Philippines.

Nickel ore exports have been slow since the beginning of the year, with a 27% drop in export volumes year to date compared with the same period last year, according to Arrow Research.

Also adding to the woes of the Supramax and, to an extent, Panamax market, is the news of ban on Bauxite mining in Malaysia’s Kuantan region being extended, sources said.

FRONT-HAUL BUSINESS DRIVING UP ATLANTIC DRY-BULK MARKET

This year’s soybean harvest has reached the ports in Brazil and Argentina and this has been the most liquid (and lucrative) Panamax export route from the Atlantic to the Far East for the last quarter.

The front-haul route from Brazil to China has steadily pushed up over the second quarter. Platts assessed the soybean export route from Santos, Brazil, to Qingdao, China, basis 60,000 mt at $14.75/mt on April 1. This route peaked at $17.75/mt on May 19 before closing at $17.50/mt on June 30.

These levels are significantly lower than the same period last year, when this route averaged out at $22.80/mt over the quarter, according to Platts data. The lower prices can largely be attributed to lower bunker prices this year, but fleet growth has played a major role as well with a huge number of Ultramax to Kamsarmax vessels being delivered this year.

Export volumes for soybeans and soybean meal from South America have also been relatively stable, Brazil is projected to export 75.5 million mt, a 1.5% increase on last year. Argentinian exports are projected to reach 43.45 million mt, a 1.6% decrease.

The new corn harvest is also coming down to ports in South America but market sources have reported that many corn stems are now being switched from South America up the US Gulf. Brazilian exports of corn are expected to reach 23 million mt this year, up 0.5 million mt, While Argentina exports are up to 23 million mt for this year’s harvest, a 5 million mt rise. There has been an increase in US exports and according to the USDA, “Reduced corn production in Brazil and harvest delays in Argentina have improved the relative competitiveness of US corn in recent weeks.”

This rise in US exports has led to unseasonably high front-haul freight rates in the US Gulf in the last month. Usually front-haul rates peak here in the third and fourth quarter, when grains start being exported from the Mississippi River in huge volumes. The grain route from New Orleans, Louisiana, to Qingdao, basis 60,000 mt, was valued at $25/mt on May 4, but this number had risen to $29.25/mt by June 30. In the same period last year, voyage rates actually fell by $1.25/mt, although bunkers did see significant rises this year, which contributes to rising freight rates.

August is normally a relatively slow month in the dry bulk market with many market participants away on holiday and few strong loading areas until the US grains season kicks off in September. However, the harvest has been delayed in South America, so exports are expected to keep pushing out through August. This rise in US front-haul activity has also had the effect of running down the tonnage list in the North Atlantic which means it could stay relatively firm in spite of the weak outlook for steel and coal demand.

Source: Platts 

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