The Capesize market has witnessed a precipitous drop in rates since six year highs as recently as September and by last Thursday BCI had once again dropped into negative territory(-31) with the timecharter average at US$1,992 only a few dollars above its all-time low in February 2016.
Clearly the greatest source of concern is the fall in Brazilian Iron Ore production principally due to very adverse weather conditions in Q1 though concerns are now growing that a sharp rise in Covod-19 infections in Brazil may start to negatively affect internal logistics. Vale’s Iron ore production in Q1 at 59.6mt for fines/lumps and 6.9mt for pellets were in fact the lowest quarterly figures since Q2 2009
and they have since lowered 2020 production guidance from 340-355mt down to 310-330mt. Exports for the first 4 months of 2020 at 94mt are down 9mt yoy, significantly below expectations considering last year shipments were severely affected by the Brumadinho dam disaster and 16mt lower than the same period in 2018. Shipments from Brazil usually pick up strongly in May but data suggests that over the first two weeks of May only around 9mt of iron ore has been exported, already down around 15 per cent yoy.
On the other hand iron ore shipments from Australia at 273mt to April are up 20mt(+8 per cent) yoy as the Q1 cyclone season was less disruptive than usual. The vast majority of that increase is to China(+17mt yoy) whilst exports to Japan, South Korea, Taiwan, Vietnam and Indonesia(the five largest importers of Australian iron ore after China) all registered small gains.We would expect Australian monthly exports for the rest of the year to be broadly similar to last year thus only another 5-10mt increase yoy with total exports around 920-925mt.
At present there is no shortage of iron ore demand from China. Blast furnaces were not shut down during the lock down earlier this year and though steel inventories increased in Q1 they are now starting to decline as industrial activity resumes and both domestic steel production and prices for steel rebars were marginally up during April. Despite strong iron ore imports stockpiles built up at Chinese ports are also reducing. But China cannot sustain the iron ore market alone and there are fears that shipments to Japan, South Korea and Europe, the three largest Importers of iron ore after China, accounting for about 20 per cent of all iron ore movement, may see permanently reduced trade due to the negative effects of the recent economic downturn on their respective steel industries. Indeed one analyst estimates a loss to between 30-40mt seaborne iron ore trade to Japan, South Korea and Europe this year.
So will there be any respite from rock bottom freights?. Shipment volumes from Brazil in particular should seasonally improve in second half 2020 provided there are not further disruptions to production, which will help tonne:mile demand, whilst the iron ore commodity price rising to US$90
for 62% fe is evidence of strong current Chinese demand. Rates should improve in the second half of the year but it may take some months to return to anything like normalised markets as there is also a significant supply side challenge facing the sector this year. In the four months to April 32 Capesizes(mostly Newcastlemax’s) have rolled out of yards together with 2 x 400,000 deadweight Valemax and 8 x 325,000 deadweight Guaibamax’s. These VLOC’s (totalling over 10mt cargo carrying capacity per year) will all go straight into the Brazilian iron ore trade and a tonnage imbalance
on the Brazil/China trade is a serious concern should the further 2 Valemax’s and 20 more Guaibamax’s on the nominal order book all deliver later this year! In addition, there is currently significant idle tonnage to absorb whilst effective supply of Capesize/VLOC tonnage has grown due to fleet speeds rising as bunker prices have plummeted. (Howe Robinson Research)
Slide of the Week 22/5
There has been a significant structural change in the seaborne cement market in Asia over the past 5 years with China moving quite rapidly from the world’s largest exporter five years ago to last year becoming the world’s premier importer of cement, passing the USA (at 16.2mt – 2019) and Bangladesh(12.1mt).
China’s cement production totals a massive 2.32bt but over the past 3 years older and more polluting kilns have been taken out of operation accounting for 108mt of capacity, reducing available product to export whilst at the same time leaving a shortfall in some coastal areas. Increased imports account for some of this shortfall but imports represent less than 25 per cent of this lost production indicating slightly declining domestic demand.
Most of this uplift in Chinese imports has been supplied by Vietnam’s burgeoning cement industry which now ranks as No.2 behind China seeing production accelerate from 61mt in 2015 to 95mt last year; remarkably as recently as 2016 Vietnam did not export to China, rising spectacularly to 17mt in 2019. South Korea at 2.4mt, Thailand at 1.75mt and Indonesia 1.3mt are all countries to benefit from this changing trade flow whilst UAE which has never exported cement to China until last year provided 1.27mt. Almost all China’s cement imports are carried as clinker on Supramax tonnage which has provided some benefit to this sector above and beyond lost exports.
Chinese cement exports look likely to dwindle to around 2.5-3mt this year and will be mostly short-haul to Hong Kong and The Philippines as previously important export markets of Australia and USA also dry up in part due to political as well as commercial considerations.. As recently as 2016 China exported 4mt to Bangladesh, who by contrast are now having to compete with China for Vietnamese product. Traditionally Vietnam has been Bangladesh’s principal supplier but strong Chinese buying interest has led to Bangladesh’s imports from Vietnam halving to 3mt in 2019. Instead Bangladesh is buying slightly more clinker from Indonesia and Thailand but increasingly sourcing cement from Pakistan and UAE, illustrative of the changing picture of seaborne cement trade flows across all of Asia. (Howe Robinson Research)