Can Brazilian Iron Ore Improve Freight Rates?

Can Brazilian Iron Ore Improve Freight Rates?

The freight market, which performed so well in Q1, has certainly not delivered in the past 4 months. BDI has dropped from 1,621 on 20 March to hit 747 on July 29. Panamax ships have not been above USD 10,000 per day since February20, and below USD 5,000 per day for most of June and July, according to BIMCO.

“Challenging market conditions were expected, but rates below USD 5,000 per day were an unpleasant and unexpectedly low level,” BIMCO added.

The anticipated freight rate recovery for Capesize ships in particular should start soon. More long-haul shipments of Brazilian iron ore are required to deliver significantly higher freight rates.

Supported by seasonality, in conjunction with the announcement made by Brazilian mining giant Vale, expecting its iron ore shipment in second half of the year to be 22% higher than the first half, the case is still on target.

Freight rates on the West Australia to Qingdao, China, route peaked in March at USD 22,661 per day (today: USD 6,681 per day), whereas freight rates Brazil to Qingdao, China, hit USD 40,797 per day in March.

As explained by BIMCO, lack of cargo has caused more widespread idling of dry bulk ships in recent months. Poor freight rates have discouraged opportunistic repositioning and less available cargoes has meant a fierce fight for them, putting downward pressure on earnings.

What is new in the supply side outlook is the lift in estimated 2016 deliveries. The overall order book has grown by more than 10 million DWT in the past two months, with the majority of those contracts destined to be built for as late delivery as possible.

New orders in total have climbed to reach 41 million DWT, out of which 50% is for Capesize ships and VLOCs. Amongst the noticeable orders are 4 ships with a capacity of 260,000 DWT placed in a Chinese yard by the Australian mining company Fortescue Metals Group.

On another scale, Brazilian mining giant, Vale have only three VLOCs with a capacity of 400,000 DWT left for delivery.

According to the schedule, the ships will be delivered before the end of this year. Vale will then control a fleet of 35 VLOCs, owned or chartered-in.

Year-to-date, 8.1 million DWT has been demolished in total, with Panamaxes rather surprisingly being toppled by the other segments. 2.8 million DWT of the total demolished ship capacity were Capesizes, 1.8 million being Panamax capacity, with 3.5 million DWT being split between the Handy segments.

Press Release; August 19, 2014; Image: Vale