Capesize bulkers market stagnant

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Global charter rates on Capsize bulkers stay stagnant at the moment. While the market bottomed out last month, the average rate on the world's four key lanes stood at $25,698/day on Sept. 30, down more than $10,000 from the level a month earlier. Negative factors include a drop in the volume of iron ores sold in spot deals, a fall in China's ore imports and a resultant ease of ship congestion at Chinese ports, and tactics ahead of annual negotiations on ore prices for 2010. However, China's shift to imported iron ore will remain unabated. Steel production in Japan and Europe are on a recovery track. Amid a mix of bullish and bearish sentiments, many players are keenly watching how the market will move after China's National Day holidays.

* Letup in spot deals
"No statistical data are available, but we don't see any visible fall in the volume of iron ore exports from Australia and Brazil," said an official with a Japanese shipping operator. Asked why the Capesize rates stay slumped when the cargo volumes have not changed much, he pointed to changes in the factors that comprise the ore trade.
The rates climbed to the $100,000/day level in June. The main driving force at the time was a large volume of iron ores sold by resources majors to midsize Chinese steel mills and traders under CIF-based spot deals. Brazilian and Australian mining firms gave a boost to the market by chartering a large number of Capesizes to haul their iron ore to China.
The shipping official said of the current market situation, "There has been no change in the overall volume of iron ore shipments. But shipments to China have decreased in volume though there has been an increase in shipments to Japan and Europe, where steel production is picking up. In most cases, Japanese and European steelmakers buy their ores in FOB deals and move them with vessels fixed under long-term charter contracts. In contrast, Chinese steel mills chose CIF deals and move their imports with vessels chartered under spot contracts. The market has lost one of the boosting factors as a result of a drop in the number of such spot deals." There is apparently a temporary lull in China's iron ore procurements.

* Fall in Chinese ore imports
The Japanese shipping official said, "Rolled steel demand in China is easing off. Steel prices have fallen as compared with some time ago. The country's iron ore imports are in a lull at the moment." Until quite recently, China had been importing ores at a pace of 600 million tons a year, much higher than last year's 440 million tons. Imports are slowing down after such a rapid growth.
The volume of ores in store at Chinese ports has now reached 73 million tons. The official said of this, "China's stockpiles exceeded 90 million tons at one point before the Beijing Olympic Games. At the bottom level, they totaled around 65 million tons. For China which imports as much as 50 million tons a month, 73 million tons is not a crisis level."
More of a problem, according to the official, is a rapid ease-off of ship congestion at Chinese ports brought by a letup in ore imports. One of the factors responsible for the upbeat drybulk market that lasted for five years till last fall was the serious ship congestion at the loading ports in Australia and other exporting countries. Much of the market surge in June this year came from the congestion at Chinese ports. This effect is now wearing out.

* Moves ahead of price negotiations
One market-related official said, "There are apparently moves in the runup to annual price negotiations for iron ore to be traded in 2010. They may be affecting the market."
There have been persistent rumors that Brazilian mining giant Vale is reluctant to sell ores to steel producers. One related official said, "We hear that Vale wouldn't offer spot cargo to a certain Chinese mill. We don't know what the truth is. There is the possibility that Vale is taking a strategy to mark up prices in the runup to next year's price negotiations."
Another official added, "Normally, price negotiations in effect get under way around October. I wouldn't be surprised if a Chinese mill failed to get cargo at this time." The truth remains shrouded in the bush. But reduced spot cargo can lead to a lower market.

* Japanese, European mills recovering
On the other hand, there is bright news. Steel production is gradually picking up at Japanese and European mills where recovery has been overdue. One Japanese shipping official, who recently visited European steelmakers, commented, "Crude steel production in Europe has not regained its dynamism yet. But it has hit the rock bottom. The situation differs from one mill to another. But generally speaking, the production has recovered to 70-75% of the peak level. Steaming coal shipments to European electric power companies are also relatively firm. There have been no visible drops."
Japan's crude steel output has recovered to around 80% of the peak level. At the beginning of the year, major Japanese steelmakers who enforced a drastic production cutback asked shipping operators to remove some of their ships from long time-charter contracts. Many of those ships have been brought back to serve steel mills now that steel production has begun perking up. Ships once removed from long-term charter contracts and put in the spot market have now dropped in number. This may help push up the market.

* China's ore output slowing down
Future trends of China's iron ore output can be a positive market factor. The same Japanese shipping official said, "China's iron ore production has begun to slow down. At the present pace, the output will remain flat or may modestly decline this year." China turns out iron ore at home while importing a large volume. According to a related official, the country's ore output more than trebled to about 800 million tons in 2008 from an estimated 250 million tons in 2001. This growth pace has been slowing down.
The official said, "Any quantitative expansion may be difficult now. Any further increase in the output will lead to quality degradation. We hear that mills are becoming reluctant to use ores with lower iron content and more impurities. There will be a further shift from home-produced ores to imports. There is the great possibility that Chinese ore imports will grow faster than its crude steel production." Many market officials are of the view that Chinese ore imports will keep growing though they are in a temporary lull at the moment.

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