MSI: iron ore drives bulker rally but spot market could be set to fall

The dry bulk market shrugged off Chinese government-enforced cuts in steel production to post more positive freight rates in October, with average monthly spot and 1 Yr T/C rates higher than any month since 2014 for all bulker benchmarks.

Iron ore imports to China remain the strongest driving factor despite the downside risks. The most recent steel data available show a slowdown from the very high production levels of Q3, but there is still robust demand for tonnage for ore imports. Iron ore and metallurgical coal prices in China have both risen by about 17% so far in November, another sign that there is still strong demand for tonnage.

According to data derived from AIS movements, Brazilian exports in capesize vessels were up 6.5% year-on-year and those from Australia 3.1% year-on-year in October. The contradiction of weaker steel output and stronger ore imports is partly explained by lower domestic ore output: September was the worst month for ore production since May and a 13% drop since the peak in June.

“This has been a key tenet supporting MSI's forecast of stronger freight rates towards the end of this year and is an indication of Chinese steel manufacturers’ increasing preference for higher quality iron ore found in Australia and Brazil,” said MSI Dry Bulk Analyst Will Tooth. “MSI expects that the Chinese government’s focus on pollution will see even greater shifts away from the use of domestic ore with a lower iron content, due to the greater emissions produced.”

However MSI forecasts a drop in spot earnings by January next year for all size categories with the largest drop expected to come from capesize earnings. It expects capesize earnings of around US$12 700/day in January, a 36% decline from October’s average.

Further compounding a weaker market in January, MSI forecasts an annualised fleet growth of 2.5% over the next three months. This relatively strong growth mainly comes from the large increase in deliveries that it expects in January.

“However the better news for the market is that deliveries are expected to slow thereafter, particularly for the 10 – 65 000 DWT segment for which the orderbook currently represents just 5% of the fleet,” added Tooth. “Slower deliveries and a seasonal uptick in demand will support rates in Q2 next year and we forecast an increase in April by on average 23% from January's lows.”

Recent freight rate developments broadly match historical trends, with capesize October earnings 147% of the annual average for the past five years and January spot earnings 87% of the annual average historically.

Read the article online at: https://www.drybulkmagazine.com/special-reports/27112017/msi-iron-ore-drives-bulker-rally-but-spot-market-could-be-set-to-fall/