Capesize freight rates hit new 2020 peak

Capesize freight rates on key routes climbed to a new 2020 peak this week and are now at the highest level since December 2019 as rising Brazilian spot cargo volumes continued to buoy the market.

The price rally has come largely on the back of a rise in Brazilian iron ore spot market cargoes. These shipments have depleted much of the available tonnage for July-loading and intensified competition among charterers. This has pushed the Tubarao to Qingdao rate up to $19.65/t on 17 June from $9.25/t two weeks earlier. At current fuel prices, this is a time charter equivalent (TCE) rate increase of around $20,000/d to approximately $23,500/d.

A revival of the Chinese steel industry is one of the main drivers behind this. Steel production in China has been gradually ramping up again and drawing on portside iron ore inventories, which dropped to a three-year low of 108mn t at the end of May. Depleted port inventories have helped drive renewed Chinese demand for Brazilian iron ore imports.

But some market participants have indicated that the higher market level may be short-lived. There are fewer charterers active today than earlier in the week and, while there is a distinct shortage of available ships for July, there will be more available for August with a significant number of vessels ballasting across from the Pacific.

Brazil's iron ore production has not fundamentally changed. The leading producer, Vale, has kept its iron ore production guidance unchanged at 310mn-330mn t for 2020 after the recent mine closure and reopening. This is below its originally expected target for the year, which was 355mn t, although it is up from its 2019 iron ore production of 302mn t but well below its 2018 level of 385mn t.

And there are some concerns about Chinese steel production as a new outbreak of Covid-19 has occurred in Beijing with confirmed cases reportedly outside the city.

Australian hike

Australian Capesize freight prices have reached a peak for 2020 as the rate between west Australia and north China rose to $8.25/t — the highest since 13 December 2019.

The rate has been driven by the same factors as Brazil, with a significant number of owners moving their ships towards the more profitable Brazilian markets and forcing Australian iron ore producers to hike their bids in order to secure ships.

The market has jumped to $8.25/t on 17 June from $5.10/t two weeks earlier, which at current fuel prices is a TCE rate increase of around $15,000/d to approximately $21,500/d.

Iron ore shipment volumes from Australia have also been comparatively high this month, which has added to the momentum generated by Brazil. Australia is on track to ship 79.6mn t of iron ore during June, Argus data show, which would be the highest so far this year. Part of this is driven by Chinese steel demand, but also by the upcoming end of the Australian financial year on 30 June, which participants have suggested also spurs an increase in volumes. The pace of Australian exports has already slowed slightly as it was on track for 80.9mn t earlier this week.

Australian iron ore shipments to China are likely to remain higher year-on-year but freight rates could slip back to previous lows if momentum from Brazil fades. Shipment volumes were 18.5mn t higher year-on-year at 272mn t during the first four months of the year but the rate between west Australia and north China only averaged $5.37/t over the same period — largely because of a lack of Brazilian momentum.

By John Ollett