Dry bulk is the world’s largest ocean shipping sector by volume, and the most important dry bulk trade lane is Brazil-to-China iron ore, driven by the production of Brazilian miner Vale (NYSE: VALE). Toward the end of what has already been a roller-coaster year, Vale has announced yet another revision to its production outlook, one that implies short-term pain but long-term gain for dry bulk.
New Vale guidance
On Nov. 11, Vale estimated that its full-year 2019 iron-ore sales would be 307-312 million tons, fourth-quarter 2019 (4Q19) sales would be 83-89 million tons and 1Q20 sales would be 70-75 million tons.
On Dec. 12, Vale brought the 1Q19 estimate down to 68-73 million tons, representing a range-midpoint reduction of 2.8%. It cited seasonal weather issues as well as new safety procedures involving the disposal of tailings (waste rock) that will temporarily bring its Brucutu mine to 40% of capacity.
The Brucutu mine was the site of a tragic collapse of a tailings dam in January that killed hundreds of local residents and closed the Brucutu mine for much of the first half of last year. The resultant drop in Brazil-to-China iron ore volumes crippled spot rates for Capesize bulkers (vessels with capacity of 100,000 deadweight tons, DWT, or more; usually around 180,000 DWT).
Now for the good news: While reducing its 1Q20 estimate, Vale is forecasting significant growth for full-year 2020 and 2021. It has just revealed estimates for 2020 sales of 340-355 million tons and 2021 sales of 375-395 million tons. The range midpoints imply volume growth of 12% in 2020 versus 2019 and 11% in 2021 versus 2020.
According to Frode Mørkedal, shipping analyst at Clarksons Platou Securities, “While the 1Q20 guidance would, isolated, put further pressure on a seasonally weak quarter — Capsize 1Q20 FFAs [futures] are currently trading at $14,800 per day — the full-year guidance is positive.”
He noted that a 180,000 DWT Capesize can do 4.2 Brazil-China voyages per year, and thus, the new Vale guidance implies demand for an additional 53-54 Capesizes in both 2020 and 2021.
Capesize rates rising again
The Vale news comes against a backdrop of rising Capesize rates in late November and early December, the latest twist in a volatile year.
Capesize rates hit a low of around $3,500 per day at the end of the first quarter in the wake of the Brucutu accident, rose to around $20,000 per day by late in the second quarter, then peaked at $38,000 per day in early September. Rates retreated to around $18,000 per day by the third week of November.
Rates then began climbing again. As of Dec. 3, Clarksons Platou Securities estimated that Capesize spot rates had increased to $24,500 per day, up 19.4% week-on-week.
The latest rebound was predicted in FreightWaves interviews last month with Jefferies analyst Randy Giveans and BreakWave Advisors founder John Kartsonas. Kartsonas, whose company created the BreakWave Dry Bulk Shipping ETF (NYSE: BDRY), foresaw a “small rally towards the end of the year” due to “seasonality.” That is now happening.
Giveans foresaw a “December bounce” as iron-ore cargoes picked up and as more Capesizes came offhire for the installation of exhaust gas scrubbers. Starting Jan. 1, any vessel without a scrubber must switch from cheaper 3.5% sulfur fuel to more expensive 0.1-0.5% sulfur fuel. Giveans told FreightWaves that he wouldn’t be surprised if Capesizes topped $25,000 per day and even touched $30,000 per day by year-end. That prediction is on the verge of coming true.
Mørkedal said that the improvement in Capesize rates over recent weeks has been driven by increased spot activity out of Brazil. In other words, there may be a slowdown in 1Q20, but not yet. He also noted that more Capesizes are indeed going out of service for scrubber installations.
He told FreightWaves on Nov. 11 that no more than 16 bulkers of 100,000 DWT or more were in the yards for installations. In a client note on Nov. 28, he doubled that number, to 31, equating to 2% of the global fleet.
The U.S.-listed companies with the greatest exposure to Capesize spot rates are Genco Shipping & Trading (NYSE: GNK), Star Bulk (NASDAQ: SBLK), Golden Ocean (NASDAQ: GOGL), Navios Holdings (NYSE: NM) and Seanergy (NASDAQ: SHIP).
In midday trading on Dec. 3, Capesize rate impacts on the stocks were being overshadowed by the negative pressure related to the U.S.-China trade war. Earlier in the day, U.S. President Donald Trump stated that a resolution to the trade dispute might not come until after the 2020 election.
Ocean shipping stocks in general are being heavily affected by investor sentiment toward the trade war. Dry bulk stocks are particularly exposed given how much demand for these vessels relies on Chinese economic health. It has been argued that a weakening of the Chinese economy will lead to central government stimulus, which will in turn lead to infrastructure construction and thus more iron-ore imports for steel production — but this optimistic theory does not seem to be swaying U.S. stock pickers. More FreightWaves/American Shipper articles by Greg Miller