By Nick Ristic
Since we last wrote about this market, rates have continued to strengthen approaching ‘good old days’ territory. Both fundamentals and improved sentiment have brought us this far, but have we reached a short-term peak?
Rally in context
It’s only been three weeks since our last report on the Capesize market, but the blistering surge in freight to decade-high levels warrants taking a step back and giving an update on the drivers of this bull run. The Baltic’s Capesize average hit $44,817 per day yesterday, up by $33,000 since the start of March (280%) and the highest since 2010, before falling back to $42,852 per day today. This peak is nearly $10,000 higher than that of last October’s rally, and given how unseasonal the movement has been, rates are nearly three times higher than average for this period over the last five years.
Before today’s wobble, FFAs were also on a tear, helping to fuel the physical market. The May contract hit a high of $47,000 yesterday, almost doubling since the start of April, but has dropped below $40,000 at the time of writing. The last time a month averaged above $47,000 per day was May 2010. The deferred contracts have also seen enormous gains, implying greatly improved long-term sentiment. Cal 2022 printed just shy of $22,000 yesterday, $8,000 higher since the start of the year.
What has been driving demand?
Positive news has continued to come from the Pacific. As the iron ore price breaches $200 per tonne, shippers in West Australia are trying to maximise their sales, with healthy steel margins in China supporting demand. For some, the approaching Australian financial year close provides an extra incentive to boost shipments over the coming weeks. Australian iron ore exports totalled more than A$14bn last month, the highest ever and made up the largest component of Australia’s total bulk commodity exports.
This activity, compounded with the inefficiencies that we have seen emerge in the Pacific due to crew changes and quarantine requirements (see The Big Picture on April 15th), have continued to support this basin. Our assessed TCE for a Pacific round voyage (C5) has held an average premium of $4,600 over that for a Brazil - China round voyage (C3) since the beginning of April.
Coal makes a comeback
While strong iron ore fixtures may be getting the headlines, it is actually coal that we have seen drive increased employment in this market. As we wrote last week, coal trade has surprised on the upside so far this year as industrial power demand recovers and China finds itself short ahead of it’s summer demand season.
Capesize coal demand grew by 37% last month versus April last year, and reached the highest level ever, amidst a boost in shipments from atypical sources and a shake-up in trade patterns due to the Australia - China trade tensions. In comparison, demand from iron ore trade was up by 11% YoY over this period, though it fell 5% MoM and was flat versus average monthly demand over the last 12 months.
Capesize coal shipments from Russia hit 3.5m tonnes in April, 57% higher YoY, while we recorded 3.0m tonnes of coal shipped from the USA, 140% higher YoY, underpinned by strong Chinese demand for high quality coal. US coal exports, for example, are almost 80% more demand-intensive versus those from Australia, so this increase has helped to tighten the market.
Meanwhile, Australian coal exports, though still banned in China, are becoming more demand-intensive as they find their way into more distant markets. India’s share of Australia’s shipments, for example, has grown to 16% so far this year, up from 5% over the same period last year. As such Australian coal is traveling further and tying ships up for longer. The average laden leg for a Cape hauling Australian coal has been 32 days so far this year, six days longer YoY.
Cooling off?
Following today’s correction, many are questioning whether we’ve hit the peak and are heading back down to ‘normal’ Q2 levels. The neck-breaking rally to yesterday’s high may have been unsustainable, but worsening tensions between Australia and China have also spooked participants, with the prospect of Chinese restrictions on Australian iron ore supply weighing on sentiment.
At this stage, those fears do not seem likely to be realised. Australia supplies 57% of the seaborne iron ore market and any ban would have severe consequences for Chinese industry, though we’ll be watching this situation closely. At the same time, while the volatility is here to stay, we’re not expecting a collapse in Cape demand over the coming few months as China’s steel output is likely to remain firm through Q2.
Further out though, we are still cautious over the structural issues facing Capesize demand. In China, attempts to cool the steel sector so far this year, such as imposing output restrictions in some provinces, have not worked. In fact they have had the opposite effect as other provinces have ratcheted up utilisation rates and enjoy record steel prices. The recent moves by Chinese authorities to throttle steel exports and incentivise imports of scrap and other feedstocks may however be more successful in cooling blast furnace output. This may well be the avenue that allows Beijing to trim its purchases of Australian iron ore.