What’s on the horizon for South America?: Part 1

The long-haul nature of many South American commodity exports, combined with the wide-variety of dry bulk commodities produced in South America, makes South America a crucial region for the dry bulk shipping market. All of the dry bulk vessel classes are affected by production of South American commodities, along with any supply disruptions and logistical problems that, from time-to-time, arise in South America. South America’s primary dry bulk exporting nations, Brazil, Colombia and Argentina, are still developing countries and are prone to more disruptions than seen with major developed exporters, such as Australia. Indigenous tribes in recent years have gone as far as blocking major Brazilian iron ore railroads, which in turn has led to vessel congestion surges at major Brazilian iron ore ports. South American truckers and other workers are also well known for their strikes, while sudden increases in South American grain port congestion has become fairly common. Vessels grounding on the Parana River, where grain vessels traverse en masse, is another logistical problem often seen in South America.

Iron ore

Iron ore exports are a major component in the capesize market and Brazilian iron ore shipments are perhaps the most significant cargo capable of leading to sharp changes in capesize shipping rates. While Australia is the world’s largest exporter of iron ore cargoes, Brazil is the world’s second largest iron ore exporter. In addition, it is very significant that Brazil’s iron ore exports are shipped out of the Atlantic Basin – as in times of tight spot vessel supply, surges in Brazilian iron ore shipment activity traditionally leads to strength in capesize rates (the vast majority of Brazil’s iron ore is shipped in capesize vessels). Overall, Brazilian iron ore shipments are a major driver of the great volatility that is historically seen in the capesize market.

Last year, Brazilian iron ore exports (which are shipped primarily to buyers in Asia) climbed to a record of 366 million short t. This large increase primarily came as a result of Vale and Anglo American ramping up production. Last year’s record Brazilian iron ore production marked a year-on-year increase of 21 million short t (6%); this year another record is likely to be set. At the time of writing, 2016 Brazilian iron ore exports are on pace to climb to approximately 384 million short t. This would mark a year-on-year increase of 18 million short t (5%). Steady growth in Brazilian iron ore production and exports are expected during the upcoming years, primarily due to Vale’s plans to roll out additional iron ore production from its long-waited S11D mine.

Overall, the demand for Brazilian iron ore (and all iron ore) has remained strong, even during times when Chinese steel production has fallen. Demand has also remained strong even at times when China’s iron ore port stockpiles have been at very high levels. A key Commodore Research view has been that Chinese iron ore imports (including demand for Brazilian iron ore) has been set to remain strong, and China has continued to show the world that it has remained happy to purchase as much iron ore as global miners want to sell. So far, there still has been absolutely no decline in Chinese iron ore import demand, and the outlook for both Brazilian iron ore exports and overall iron ore demand remains promising. Looking longer-term, one of the most significant possible headwinds on the horizon for the dry bulk market regarding Brazilian iron ore exports is the possibility of Vale (and others) potentially ordering new valemaxes. In addition, there still remains talk that China and Brazil want to jointly construct a trans-Amazonian railroad in Brazil. The proposed new railroad would be used to rail iron ore mined in Brazil to the western part of the country, and then iron ore would be shipped out of the Pacific Basin. This would cut down the distance that vessels carrying Brazilian iron ore would have to travel when exporting iron ore to China and other buyers in Asia. In addition, Brazilian iron ore shipments would no longer be an Atlantic Basin cargo. Such a change in the nature of Brazilian iron ore exports would be damaging to the capesize market, but there still has been no progress made regarding building this potential new railroad. In addition, it would take many years for construction to be completed, and the overall outlook for the proposed trans-Amazonian railroad remains unlikely.

Read the article online at: https://www.drybulkmagazine.com/special-reports/21022017/whats-on-the-horizon-for-south-america-part-1/