12-01-2023 The Big Picture: Capes, By Mark Nugent, Braemar
As we start the new year, the seasonality of iron ore shipments is in full swing, and rates have started to fall. We look at some of the factors affecting the market at present.
As is widely expected most years, freight rates in the Capesize market have moved lower to start the year as seasonal factors start taking a hold of the market. As it stands, the Baltic Capesize 5TC average has declined by 35.7% YoY, printing at $11,188/day at the time of writing. In the lead up to the holiday season, the Cape fleet saw a considerable jump in supply in the East, as fewer vessels opted for the ballasting routes and instead looked to secure employment in the lower basin. According to AXS vessel tracking data, we reached the highest level of Capes in the Pacific since late-February 2022 earlier in January, as many anticipated waning demand in the Atlantic, mostly owed to weather effects and planned maintenance. In the last couple of weeks, however, more vessels have made the journey West, putting pressure on the Atlantic market which has yet to prove it has the volumes to match.
Iron ore prices have further moved to the upside in the past week, reaching 6-month highs at the time of writing. Much of this is based on raised expectations for China’s economy and continued efforts for property market stabilization. While a reflection of foreseen demand, the move is also an effect of supply concerns in Brazil, which is during its traditional rainy season. Chinese iron ore port inventories currently lie at 134.1 MMT falling by 14% compared to the 156 MMT in stocks at the same time last year. With prices on the rise, we can anticipate a further drawdown in port stocks, as is consistent with trends in the past. However, when more supply frees up in Brazil following the Q1 slump, prices will adjust, raising the prospects of greater re-stocking in future quarters, which should ultimately result in greater seaborne iron ore demand. At present, the Brazilian miners are now largely able to fulfill orders using their own vessels, with some reportedly even selling freight elsewhere as volumes slowdown as the weather-picture worsens. Meanwhile in Australia, higher prices do create the incentive for miners to push out more volume in the near-term as to take advantage of the favorable margins. While more vessels have ballasted to the Atlantic in recent weeks, there is still a lot of tonnage opting for the Pacific West Aussie routes which will put a ceiling on returns for this trade in the short-term, with the majority of fluctuations bunker price related. One contributing factor to this ample supply in both basins is an absence of Indian coal demand, largely a Cape trade in 2022, as cooler temperatures reduce air conditioning needs.
As we briefly touched on in last week’s Big Picture, a handful of Chinese state-owned companies were granted permission to import Australian coal. It has since been reported that this has been opened to more firms, though this is yet to be officially confirmed. While Capes accounted for 61% of Australia’s coal shipments to China in 2019 before the ban, overall Capesize coal liftings in Australia have continued to decline for several years despite securing new customers, some of which are further away than China. China has also turned to new sources of coal, massively ramping up domestic production and securing a trade deal with Indonesia. In 2022, Australian coal loaded onto Capes totaled 250 MMT, marking the lowest annual total in over 5 years. Including all vessel sizes, at 528 MMT, this has fallen from 634 MMT in 2019. As such, the overall declines in Australian coal exports accompanied by slowing Chinese seaborne coal demand provide limited scope for growth on the Capes despite the ban being lifted. In the event of volumes being substituted away from Indonesia to Australia, this would provide better demand for the bigger ships at the expense of the Supramaxes which predominantly do the Indo-China coal routes.
Atlantic demand slow to start Q1
In Brazil, which accounts for the majority of Capesize demand in the Atlantic basin, shipments declined by 28% YoY in December to 31 MMT and is set for further declines in January. Excluding Brazil, shipments out of the other four major Cape demand sources in the Atlantic declined by 22% YoY. In the meantime, the ballasters list has grown in the past two weeks, on the back of weak C5 returns, totaling 19.6 MDWT in Capesize tonnage heading past Singapore rising from 13.7 MDWT in the 14 days before that. This coupled with fewer volumes has naturally left the basin oversupplied, hence the decline in freight rates in the past week. Shipments from Colombia and the USA did remain in growth territory in December as European countries continued their coal-buying spree, despite milder temperatures. In December, Capes discharged 8.9 MMT of coal in Europe, the highest level since May. With colder weather expected in Europe across the next several weeks, these trades should continue to perform, along with solid bauxite volumes which declined annually off a very high base in December last year. We anticipate the strength in these trades to remain going forward and thus bodes well for the demand picture in the Atlantic once the volumes improve out of Brazil in Q2 as they historically have done.