Weight of Freight: How long can the Capesize really last?

Author Andrey Telegin, Senior Reporter

2023 was a disappointment as far as Capesizes owners were concerned. Many were expecting rates to take off in the second quarter. Instead, they were barely above breakeven levels.

But September proved a turning point and the cost to charter a Capesize vessel surged to its highest level in over a year on many of the vessel class’s key routes in both the Atlantic and Pacific. Surging exports amid stronger Chinese demand and higher coal demand with winter approaching in the northern hemisphere stretched the global supply of vessels. 

Owners may now be asking themselves how long it can last.

Capesizes take a bite out of Panamaxes 

Despite the sanctions, Russia remains a major coal exporter and demand for Capesize vessels at ports in northwest Russia has surged since August as Panamax vessels – the usual lifters in the region – moved to the southern Atlantic to service high grain exports from Brazil.

The Baltic port of Ust-Luga, which has draft limitations and cannot fully load Capesizes at berth, has loaded more than 40 such vessels this year, according to vessel tracking service FleetMon. The Capesizes can be loaded at berth but not with a full cargo — around 125,000t rather than a full 180,000t — as the ship would sit too deep in the water to exit the port.

Activity paused in August, but Panamax rates from Ust-Luga to the west coast of India soared to $40/t in early September from $27/t in late July, and charterers have since then been eagerly looking for Capesizes, despite the fact that they cannot load a full cargo.\

Murmansk to the north of Ust-Luga has also significantly increased Capesize loadings. Before 2022, Murmansk typically loaded one to three Capesizes a year, but the port loaded 24 Capesizes in 2022 and has even more planned for 2023, according to port authorities. 

To meet the new market realities, the Port of Murmansk Authority has completed the installation of harbour transshipment equipment and the port can now load heavy dry bulk carriers, making it suitable for Newcastlemax-class vessels (210,000dwt), according to port authorities. The harbour transshipment equipment was launched in June. The process starts when the vessel is by the berth and the rest of the cargo is loaded in the bay, where the draft is more than 18.3m.

Murmansk loaded its first ever Newcastlemax in early August — the 206,204dwt, 2005-built Beks Brown owned by Turkish shipowner Beks Ship Management. The firm has also purchased a number of other older Capesizes to transport Russian coal.

But this trend might be about to be reversed as Capesize rates surged at the end of September to levels not seen since July 2022, while Atlantic Panamax rates have started to slide. Securing a Supramax to load at Ust-Luga is even more difficult and some charterers that would normally use this vessel class are instead looking to secure a Panamax for part-loading. Panamax charterers are already struggling to find ships, according to market participants. In October supply of Panamaxes in the Baltic increased slightly and Russian coal rates cooled but still remain at high levels.

The opposite situation can be seen in Australia where the charterers have started to split Capesize coal cargoes on to Panamaxes which are significantly cheaper than the larger vessels in the region. The cost of iron ore freight on the bellwether west Australia to north China route jumped to $11.40/t on 9 October — its highest level since July 2022 — from a low point of $7.25/t on 24 August.

Table 2 WOF How long can the Capesize rally last

Iron ore still the big dog

One reason for the surge in Australian Capesize rates is that vessels were being drawn away from the Pacific – to carry record high exports of Brazilian iron ore and Guinean bauxite amid a surge in Chinese demand.  

Picture 2 WOF How long can the Capesize rally last

But now shipowners may think twice before moving their vessel to the Atlantic as the rates have also hit record highs in the Pacific. The 65 day backhaul surged from deep negative numbers to a relatively high $12,500/d. At the end of September BHP Billiton could find two vessels to carry coal from east Australia to Rotterdam only at around $18/t, according to market participants, compared to $12,50/t in mid-August. This has in turn stretched global vessel supply across the Pacific and Atlantic as cargo demand – and the cost of freight –surged in both regions.   

Capesize ships are being increasingly drawn westwards by Brazilian demand, carrying record-high August exports on the long-haul route from Latin America to China, which has left Australian charterers with limited options and pushed rates to record levels. And only in the end of September-early October, the first August-loaded iron ore cargoes from Tubarao have reached China.

But Australian and Brazilian slowed slightly since. Iron ore exports from west Australia in August rose by 2.2pc compared to the previous year to 75.2mn t, according to initial shipping data. But in September, exports decreased to 73.2mn t.

Table 1 WOF How long can the Capesize rally last

Most of Australian iron ore as usual sails to China but India showed up on the market this year too as its appetite rose. Shipments from Port Hedland to India were 558,428t in September, up from 371,835t in August but down from 578,000t in June, which is the first time any ore was sent to the country since January 2022. The geography of Indian iron ore imports may widen as iron ore producer Vale fixed a Capesize vessel loading from its facility at Teluk Rubiah, Malaysia, to Jaigarh from late October, according to the shipbrokers.

Brazilian iron ore exports in September slowed down too and decreased to 35.7mn t, compared to 36.1mn t in September 2022, according to preliminary data, having surged in August 2023 to their highest level since Global Trade Tracker (GTT) data began in 2002. This helped drive the key Tubarao to Qingdao rate to $26.75/t — its highest level since July 2022.

Table 3 WOF How long can the Capesize rally last

And the rates may rise further, especially for the vessels sailing in early November. “There are two markets now. One for first half of November that is too high because there are few options for the Atlantic and the other one for the second half of November that the ballaster list is longer. Owners are confident that China will continue to buy because the stocks continue at low levels,” one broker said.

In early October Brazilian iron ore exports are getting seasonally lower as rainy season is coming soon and storms are spotted on the south of the country. But compared to previous year the volumes are still strong. Exports are now on track to reach 26.9mn t in October 2023, compared to 26.7mn t in October 2022, according to preliminary data.

Nonetheless, additional ships in the Atlantic are being absorbed by higher exports from west Africa. Bauxite has emerged as a key driver of Capesize rates as Guinea's bauxite exports jumped by 30pc on the year in the first half of 2023 on the back of a recent mine capacity expansion and a comparatively dry rainy season. The exports also became a key driver of Capesize freight rates, absorbing a number of vessels needed in Brazil and pushing rates up, according to shipbroker Ifchor-Galbraiths.

Guinea exported 54.6mn t of bauxite in January-June, up from 39mn t a year earlier and from 35.5mn t in the first half of 2021, according to Global Trade Tracker (GTT), with most volumes sent to China. As Sierra Leone iron ore exports and Gabonese operations are to rise, demand in west Africa will play more and more important role on the Capesize market tightening supply.

Tonnage tightens in the north Atlantic

This has been one factor in charterers in the north Atlantic also struggling to find tonnage even despite lower demand for coal in Europe and maintenance at Saldanha Bay, South Africa.

According to shipbroker Arrow, a number of ballasting vessels available in the south Atlantic ocean has dropped significantly in August-October and some brokers believe this situation will persist until mid-November at least. 

Colombian coal producers are adding demand to the undersupplied Capesize market too. Colombia is expected to export 60mnt-60.5mn t of steam coal in 2023, up from 54.49mn t exported last year, according to the president of Colombian mining association. And significant part of this coal is heading to Asia Pacific, South Korea and China. At the end of September, Glencore’s ST Shipping fixed the Jag Anand for the voyage from Puerto Bolivar to China or South Korea at around $37,000/d, according to the brokers compared to slightly above $30,000/d in mid-August.

South African coal exports to Asia-Pacific surged in August, as rising demand there offset a sharp decline in deliveries to Europe. Combined exports from South Africa were largely stable on the year at 6.36mn t. Exports over the first eight months of the year stood at 49mn t, up slightly from 47mn t a year earlier. South African flows to India surged by 94pc on the year to 2.4mn t in August even rising despite domestic output in India which supports rates between Richards Bay and west and east coast India.

And Canadian iron ore exports increased in January-August 2023 to 35.4mn t compared to 34.7mn t year before even despite wildfires which closed the port of Sept-Iles for almost two weeks in June. But charterers are struggling to find the vessels and in October ArcelorMittal secured a vessel owned by Mitsui OSK Line's (Mol) for loading from Port Cartier to Japan at $33.75/t compared to the $25.75/t Glencore paid for a vessel loading from Sept Iles, Canada, to Qingdao in early December 2022.

No one can predict how long the autumn rally may last but some shipbrokers believe that October and November will be strong too. “We believe that the rally could extend for a more weeks as we appear to be in a demand sweet-spot with west African volumes recovering whilst Brazil is yet to see the seasonal rains begin. But once the seasonality plays out and the balance is restored, we expect the freight market to cool, although rates are unlikely to retreat to the summer lows within fourth quarter”, Arrow said.

Forward freight agreements (FFAs) are not very reliable forecasting tool but for now they show high levels for Capesizes until the end of the year, around $20,000/d for the fourth quarter on average, according to one broker. By Christmas we will probably know how long was the prosperous period for shipowners, and how harsh the seasonally slow winter market. 

Already now, in late October we can see the first signs of softer Capesize market, especially in the Atlantic. Freight rates for the vessels loading from the second half of November are getting lower.

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