Viewpoint: Capesizes to see 2020 iron ore pressure

The Capesize market for dry bulk commodities remains in an uncertain position moving into next year. Demand and supply trends seem to indicate increased pressure on freight rates and a potentially weaker market. But the impending IMO 2020 sulphur regulations could change the entire landscape of the industry and boost volatility, particularly in the first and second quarters of 2020.

Iron ore demand has remained the principal driver for Capesize vessels during 2019 and will be so again in 2020. Shipments of iron ore to China from Australia and Brazil are the key factor in demand, but the substitution of Australian material for Brazilian and an overall fall in Chinese imports is creating significant pressure in the industry.

Chinese iron ore imports in the first 10 months of this year were 877.26mn t, according to customs data, 14.25mn t down from 891.51mn t in the same period a year earlier (see China iron ore imports table). The overall trend for Chinese imports is of decline and, if imports continue at their current pace, 2019's total will be 11.63mn t lower than a year earlier at 1.05bn t. This would be the equivalent of 65 fewer Capesize shipments during the year, or around five shipments each month. Chinese iron ore imports recorded a similar year-on-year drop of 11.05mn t in 2018, which was the first annual decline since 2010. Chinese iron ore imports have only declined in three years since 1996 — in 1998, 2010, 2018.

Australia supplants Brazil

Australian iron ore shipments have continued to supplant Brazilian shipments into China. During the first 10 months of 2019, Australia provided 64.78pc of Chinese imports compared with 63.7pc a year earlier. But Brazil's share of Chinese imports dropped to 19.61pc during the first 10 months of 2019, from 21.04pc in 2018 (see Share of Chinese iron ore imports table).

This drop was in part owing to the collapse of a tailings dam at Brazil's largest iron ore producer Vale's Feijao iron ore mine on 25 January, which killed more than 200 people and resulted in a series of mine closures throughout the year.

And the rise of the Valemax class of vessel is exacerbating the shift in iron ore exports. Vale is looking to export almost all of its iron ore on these new 325,000-400,000 deadweight tonne (dwt) ships, and operates at least 67 vessels. Vale is looking to increase its annual shipping capacity by a further 82mn t by 2022, further reducing its required Capesize vessels. This will continue to reduce the number of Capesize shipments available from Brazil in 2020.

Shipping a cargo from Brazil to China can take a Capesize vessel out of the market for three times longer than an Australia to China shipment, and this trend will exponentially increase the number of ships focusing on Australia and increase the pressure on rates on that route.

The IMO impact

Demand may be putting pressure on Capesize market rates, but the upcoming IMO sulphur regulations have the potential to significantly increase volatility in the market.

From 1 January 2020, shipowners must switch from their current 3.5pc maximum sulphur fuel to 0.5pc maximum sulphur fuel, or they must start using an exhaust scrubber to remove the sulphur from the fuel.

This new lower-sulphur fuel could be considerably more expensive, and potentially could bring a host of other problems, such as a lack of supply at smaller ports and an inability to blend different supplies. Currently, 0.5pc sulphur fuel in Singapore is priced at $503/t — a $200/t premium to 3.5pc sulphur product. For a Capesize burning 43 t/d of fuel, this would be an additional $8,600/d and $180,600/d — or $1/t — on a standard three-week voyage.

Alternatively, vessels with scrubbers could operate without having to pay this premium, and participants are divided on how this would impact the market. Some suggest it would create a two-tier market, while others indicate that there would be one market rate that would either remain in line with scrubber-fitted ships, creating losses for other owners, or with 0.5pc burning ships, creating significant profits for owners with scrubber fitted vessels.

There will be 965 scrubbers installed on bulk carriers over 2019 and 2020, according to classification society DNV GL, and the vast number of these will be on Capesize ships, as the most economic vessel class for a scrubber.