April 18, 2017
By Titus Zheng, FIS Singapore
The freight market is enjoying a pre-Easter surprise rally with rising rates, virtually unaffected the recent plunges in seaborne iron ore prices but some detect the beginning of some post-holiday jitters.
Spot prices of iron ore have taken a beating throughout the week and recorded a five month low of below $70 permt. Despite the drop, the capesize time charter average went from strength to strength and saw rates bounce from $15,493 on Monday via a 5% increase to $16,287 on Wednesday.
“Overall, there is a feeling that the physical market is improving well in the run up to the Easter holidays,” said a FIS FFA broker.
However, things are not smooth with the iron ore market that often moves in tandem with capesize rates. Demand for seaborne iron ore product in China appears to be falling as domestic producers ramp up cheaper low quality product to chase higher prices.
With more supplies coming online – and coupled with a high iron ore inventory of 133.17m tonnes sitting at Chinese ports, the incentive to import remains meagre and the supply glut problem looms larger and larger as to whether China can consume the huge build-up and still import more.
The trend in iron ore market appears to resemble the pork cycle, where encouraged by high prices, suppliers produce more to capitalise on the high prices, only to see prices fall due to oversupply. Then, the lower prices forced some suppliers to leave the market, which inevitably leads to higher prices as supply diminishes.
The key of breaking this cycle may lie in improving demand; however China’s steel demand is low at the moment affected as it is by stricter regulations on bank loans to Chinese housing and property projects.
One might hope that the 2017 infrastructure stimulus undertaken by the Chinese authorities to provide the ‘spark’ in drawing down the huge port stockpiles would do the trick. However, the infrastructure spending of 2017 is fundamentally different from 2016 package as it is more focused on public works – the construction of railways, highways, waterways transportation – compared to the 2016 package which was primarily focused on housing sector.
“China has become very efficient in building housing projects and the some complexes can be rushed within 3-6 months periods using up huge chunks of steels materials,” said an FIS analyst based in China.
By contrast, the 2017 rails and waterway infrastructure projects run on a longer-term basis and take longer periods before their impact is felt by the market.
Cape rates ended the week suffering from downwards pressure on the front end and April being sold down. However, the lower rates attracted more buyers and numbers quickly recovered. Buyers continue to express the view that physical rates will improve after the Easter break and speculation as to the health of the VLOC fleet also gave the bulls another reason to add length.
Panamax rates were also spurred by firmer outlook and booked $12,676 on Wednesday, up 8% from rate of $11,750 on Monday. “An uptick in activity and rates ahead of the Easter holidays particularly in the Atlantic has encouraged buyers,” explained the FIS FFA broker.
Similarly, an uptrend was seen in supramax with rates rising from $9,116 on Monday to end higher at $9,305 on Wednesday. The handysize market was less positive with rates booking $8,122 on Wednesday from starting position of $8,053 on Monday.
Overall, the freight market has enjoyed a pleasant pre-Easter surprise but whether it comes back refreshed and enlivened or sick from an oversupply of indulgence we will have to wait and see.
The article was posted on http://www.seatrade-maritime.com on 14 April 2017.