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Port Report: Capesize dry bulk rates may be at bottom after series of market shocks

Pictured: a small Brazilian iron ore loading facility at Corumba. An unforeseen drop in the volumes of Brazilian iron ore exports, along with a decline in demand for iron ore by Chinese steel mills, has caused freight rates to plunge. Photo: Shutterstock.

Freight rates for biggest ships fall below those of smaller ships, but that is set up for rebound, market experts say.

A plunge in the capesize dry bulk freight rate may now – possibly – be at an end, according to analysis from ship and freight broker Fearnleys of Norway. Fearnleys notes that the rate for a one-year time charter for capesize dry bulk ships has fallen below the freight rates for smaller vessels.

And what, exactly, does that mean?

“This is usually a strong sign that the bottom is in or at least, very close. This coupled with seasonal tailwinds starting in March should result in an imminent market upturn for the big ships,” Fearnleys writes in its latest note.

So fans of technical analysis will be pleased as, based on freight rates alone, it’s a positive outlook.

Capesize bulkers are large ships that carry dry commodities (coal, iron ore and, to a much lesser extent, grain). They range in size between 100,000 deadweight and 200,000 deadweight. Deadweight is the measure, in metric tons, of the weight-carrying capacity of ships. A metric ton is about 2,204 U.S. pounds. Iron ore carrying capesizes are normally bigger than 150,000 deadweight and they typically serve the bigger and longer trades.

Freight rates for capesizes “are in free-fall at the moment,” says Peter Malpas, a ship broker and a director of Braemar ACM Shipbroking in Western Australia.

“After the Chinese New Year you would expect to see the capesize market pick-up. But the pick-up has not happened after this Chinese New Year,” he tells FreightWaves.

One word explains a lot, but not all, of the reasons why.

And that word is “Brazil.”

There was an appalling mining-related tragedy at Brumadinho, Brazil, recently in which 177 people died. When the tailings dam at one of Vale’s iron ore mines in the southeastern Brazilian state of Minas Gerais burst on January 25, it released a torrent of sludge and buried people and buildings in the town of Brumadinho.

In the short-term, the disaster has reduced the global iron ore supply, sending markets into a frenzy and pushing prices up 18 percent in the two-week period following the incident. Vale, which is the world’s largest iron ore miner, announced it would decommission all of its tailings dams and would stop production at those sites during decommissioning. That will reduce its iron ore output by 40 million metric tons a year. At least some of that production would otherwise have been carried on the C3 route – Brazil to China.

FreightWaves spoke to Jayendu Krishna, a Singapore-based director of Drewry Maritime Advisors for his insights into the current dry bulk markets.

“If you look at the current freight rates, they’ve fallen off a cliff,” he tells FreightWaves. He points to January’s dam disaster as a cause.

“There was a similar disaster in 2015 and it’s happened again. The dam burst and devastation took place,” he explained.

A quick back-of-the envelope calculation provides an insight into just how much surplus dry bulk shipping capacity has been created. Assume a 150,000 deadweight vessel and reduce that volume by about five percent for lubes, stores, fuel and the like. That gives a cargo-carrying capacity of about 142,500 deadweight. So 40 million metric tons of iron ore divided by 142,500 deadweight reveals that demand for just under 281 capesize voyages has been eliminated from the market.

Of course that is an extremely gross over-simplification. It doesn’t take into account the difference in distance. For instance, the main iron ore export port in Brazil, Ponta da Madeira on the north-eastern Atlantic coast, is 14,800 nautical miles distant from the iron ore import port at, say, Qingdao in China. A nautical mile is roughly equivalent to 1151 miles. A nautical mile (as originally defined) takes into account the curvature of the Earth, which is a factor when literally shipping commodities half-way around the planet.

But the route from Port Hedland, Western Australia, to Qingdao is only about 4,000 nautical miles. That means that the Brazilian route is 3.5 times longer than the Australian route. At 10 knots (one knot is one nautical mile an hour) a fully laden 150,000 deadweight capesize would spend about 62 days at sea on the Brazil-China route but only 18 days on the Western Australia-China route.

So if there are a lot more capesize vessels free owing to a drop in the volume of iron ore that needs to be carried, and large numbers of the longest voyages in terms of both time and distance have been eliminated, then it is quite understandable why dry bulk freight rates have plunged.

But a drop in the volume of Brazilian iron ore volumes is not the only factor that’s reducing demand for seaborne carriage of dry commodities.

Ocean shipping, it must be remembered, experiences derived demand. Malpas points out that demand for capesizes on the 30-day C5 route (Australia-China) is driven by the demand that Chinese steel mills have for iron ore, which is the primary ingredient in steel.

Malpas says that Chinese mills have tended to restock their iron ore stockpiles after the Chinese New Year. But that doesn’t seem to have happened this year. Chinese mills have been experiencing low profits on the sale of their steel products. Meanwhile, the price of iron ore itself – courtesy of the shortfall of Brazilian iron ore production – has risen dramatically. Chinese steel mills are facing the unappetizing prospect of paying very high input costs for their primary product but generating very low profits on the sale of their steel.

“So they’ve got no desire to restock,” according to Malpas.

An oversupply of vessels, because of a fall-off in production, and a lack of demand for carriage of ore owing to underlying market dynamics, makes for a very difficult market.

“It is not a ship-supply issue. It is demand-driven,” Malpas said.

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