By Mark Nugent
Q4 headwinds
Having arrived in Q4 with a relatively healthy market on the Capesizes, we look at several factors that we expect to soften demand on the bigger ships in the Atlantic basin until the end of the year.
Seasonal peak in iron ore shipments
In the past several weeks, the Capesize C3 route has held relatively firm, printing at $23.4/t at the time of writing, 16.4% higher MoM. Rates more recently, however, have started to soften as prompt demand is now covered and more vessels are appearing which had previously been waiting for better opportunities. Brazil exported 31m tonnes of iron ore on Capesizes in September, coming in flat YoY and 2.8% below the 5-year average. Over the last 5-years, Q4 has resulted in a 3.5% decline in iron ore volumes out of the country on average, implying a reduction of 3.3m tonnes in cargo based on Q3 shipments. Of course, much of the slowdown can be attributed to the start of a period typically hampered by weather disruptions, affecting operations at the mines in-land.
Going forward, we can expect the trend from previous years to continue this year and the slowdown in demand to become more apparent for later dates. Current weather forecasts suggest increased rainfall is set to hit the northern areas of Brazil, indicating we are unlikely to get an uncharacteristically dry fourth quarter, at least to start.
Growing ballaster list from the East
With the unwinding of Chinese typhoon congestion complete, the Capesize ballaster list heading past Singapore has started to grow again. While initially remaining low and queues largely filtering into West Australia, the resultant decline on C5 seems to have encouraged vessels which more recently discharged in the Far East to head West. According to our tracking, Capesize tonnage heading past Singapore totalled 8.4m dwt last week, rising by 19.5% WoW.
While it is known volumes out of Brazil are usually slower in Q4, it is the strength out of West Africa that has provided the support in the Atlantic recently. Overall, this is largely a reason ballasters have been confident in finding employment in the Atlantic with the Guinean monsoon season now over.
West Africa bauxite giving support
Despite what is stereotypically the monsoon season in Guinea, Q3 shipments of bauxite totalled 18.5m tonnes on the Capesizes, rising by 36.6% YoY and double the five-year average. With any potential weather disruptions mostly out of the way, we can now expect the volumes in Q4 to improve. A lot of the expansion each year has come from better efficiency in supply chains in the country but also growing mining capacity. According to Reuters, African countries produced 70.9m tonnes of bauxite in 2021 (predominantly being in Guinea), rising by 15.2% YoY and 67.3% higher than in 2017.
The strength in bauxite demand this year can be reflected in the stability of Chinese alumina, and thus aluminium, production which has proven very stable despite the macroeconomic and Covid headwinds the country has faced this year. Alumina output in China hit its highest monthly total on record in June at 7.3m tonnes and has remained near these levels since. Downside risks to this growth, however, have emerged this week as the US and China escalate tensions over the Chinese semiconductor industry, which is very aluminium-intensive, although it remains to be seen what the outcome of the situation will be.
Using our average demand intensity calculations out of both Brazil and Guinea we can estimate the loss in Capesize demand from Brazil and ultimately the extra demand needed out of Guinea to make up for the downfall. By multiplying the 5-year average decline in Brazilian iron ore shipments QoQ in Q4 (-3.5% implying a loss of 3.3m tonnes) by the demand intensity of Brazilian Capesize iron ore exports (avg 93.16 dwt days per tonne) we estimate a loss of 308.6m dwt days. To make up for the loss in Brazilian demand, Guinean bauxite exports (avg 106.91 dwt days per tonne) would have to increase by 2.9m tonnes to 21.4m in Q4, requiring growth of 15.6% QoQ and 10.8% YoY. While there are of course other factors at play, in this scenario we do not expect Guinean exports to reach new highs in Q4 and fully make up the estimated demand loss out of Brazil given the latest risks in the aluminium industry, which of course directly impacts bauxite demand. Increased Capesize shipments out of Colombia and South Africa would certainly help make up this deficit, although there are ongoing (but likely short-term) uncertainties over export volumes in both of these countries at present. In the North, we also expect to see a slowdown out of East Coast Canada iron ore, although just minor volumes, this is also a seasonal headwind facing the Capesize vessels in the Atlantic looking to the end of the year.
Strikes in South Africa
As has been well-reported, the ongoing strike in South Africa is hindering operations at the Port of Richard’s Bay. As it stands, vessels that were intending on loading in South Africa have shown little willingness to evade the country and continue to head West. While no force majeure has been officially declared, vessels are being delayed at berth due to the shortage in workers. As a result, queues have risen by over 1m dwt at the port, the highest level since mid-March.
So far, the situation has reportedly made progress but a resolution has yet to be found. As operations remain muted at the port, it will become increasingly likely vessels bypass South Africa and head further West which could further put pressure on Atlantic freight rates in the coming week.