Capesize rates on the key routes are set to finish 2024 close to their lowest levels in two years, in stark contrast to most of this year.
Volatility in the market increased throughout 2024 and this is likely to continue into 2025. But low rates for the Panamax class and below will likely temper any probable future spikes in Capesize rates, as charterers will look to split cargoes rather than hike their Capesize bids.
The average annual Capesize freight rate from west Australia to Qingdao, China, surged in 2024 year on year by 16pc to $10.09/t. And on the Tubarao, Brazil, to Qingdao route by 18.5pc to $24.95/t. But there was significant volatility throughout the year as the average voyage time increased significantly on the back of more traffic between west Africa and east Asia, which meant that short-term shortfalls of tonnage in specific regions was increasingly common.
The only sustained rally for Capesize rates this year was from late-August to early-October. But this was when the market first started to split Capesize cargoes onto smaller vessels, which remained inexpensive. This primarily took place in the coal segment, and Capesize tonne miles (tmi) for coal cargoes dropped in October by 37pc to 103.4 trillion tmi, compared with October 2023, Kpler data show. At the same time, Panamax tmi for coal cargoes rose by 14.6pc to 200.5 trillion tmi.
This trend is also likely to ramp up in 2025 as Panamax rates have been under sustained pressure in 2024 and are likely to remain a cheap alternative when Capesize rates surge. But this will affect coal to a greater extent than iron ore as coal companies can switch between Capesizes and Panamaxes quickly, while for iron ore producers in Australia and Brazil this option is typically not viable.
The most pressing question now is: how long will any particular period of low Capesize rates last? Capesize rates fell sharply in early 2024, reaching a low in January before rallying again in early February. But a repeat of this pattern is unlikely in 2025 because it was driven in 2024 by the late onset of the rainy season and low precipitation in Brazil. This year's rainy season started earlier and precipitation is ample. Also, China's and India's lower currency rates and high stocks in China's ports will probably cap trading activity for some time.
Iron ore exports from Brazil could remain low until the end of the rainy season, likely in March-April. This is despite the recovery of the Carajas railway after a December blockade and the expected restart of Vale's CPBS terminal in Itaguai in January following maintenance. As a result, the Capesize market is expected to follow seasonal patterns and remain low in the first quarter of 2025.
But a rebound may occur in the second quarter. In Brazil, when the rainy season ends, increased iron ore volumes on the long-haul route will push Capesize tmi higher. This could trigger a rally in the Capesize market, as the order book is still low and the tonnage supply remains inelastic.
The Capesize market saw several brief rapid jumps, followed by equally rapid crashes, at year end. This trend will likely continue in the second quarter of 2025 after the market recovers from the usual first-quarter malaise. Along with the propensity to split coal cargoes, the historically low dry bulk order book and increased shipments from west Africa to east Asia have also been a key factor as it limits tonnage availability and has made supply increasingly inelastic, driving up rate volatility.
Every time iron ore demand climbs quickly — especially in the Atlantic — or adverse weather conditions occur in the Pacific and cause disruptions on the route from China to Australia — a new spike in Capesize rates occurs as the tighter vessel supply is unable to quickly respond.
This Capesize-Panamax tangent might be broken under certain circumstances: if Capesize rates fall back to 2023 levels (like now) or if next year's grain harvest is higher (particularly if China increases its buying of South American grain and decreases its buying of US grain in response to Donald Trump's upcoming tariffs), which pushes Panamax rates up.
The Red Sea could also be a factor in pushing Capesize tmi lower next year if it reopens, but this is highly unlikely. Shipping association Bimco assumes it may happen in 2025 or 2026, but it may last much longer, even in the case of a possible ceasefire between Israel and Palestine.
Capesize rates in 2025 will also likely be supported by higher demand, along with increasingly inelastic supply. Shipbroker Howe Robinson expects global iron ore trade to reach around 1.67bn t in 2024, up from around 1.64bn t in 2023.
"Volumes may further increase in 2025 as Vale and CSN commercialise their planned expansion projects," Howe Robinson said. China's rising steel and automobile exports can still offset slow domestic steel demand. The market potentially sees the first Simandou, west Africa iron ore cargoes in 2025, greatly increasing the average sailing distance for iron ore cargoes, according to industry forecasts.
A further driver to overall Capesize demand will be bauxite exports from Guinea that could rebound, especially if EGA finally solves its customs problems, which is yet to be solved at year end, according to market participants. China's bauxite imports surged in August by 41pc year on year to a new record high of 15.5mn t, shipbroker Ifchor-Galbraiths said. And the volumes will keep rising as China's alumina industry needs more raw material.
Global coal trade will continue to be less significant as Capesize trade, in spite of the fact that is projected to increase in 2024 by 1.9pc to 1.47mn t, according to Howe Robinson. Bimco predicts that the trade may start shrinking next year and beyond, falling by 1-2pc in 2025 and by 1.5-2.5pc in 2026, as the use of renewables in China rises and Indian domestic output increases. But coal will likely continue as a balancing factor between Capesize and Panamax markets.
In summary, the Capesize market may continue to be slow in the first quarter of 2025, while the market fundamentally remains inflexible and undersupplied. This could trigger a series of new rallies around March-May, when the rainy season in Brazil ends and demand typically increases. But cheap Panamaxes will probably create a ceiling for any future rallies, setting a trend for a more disrupted Capesize trade for 2025, until the new harvest comes.
