The Global Economy and Its Impact on the Dry Cargo Market

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The global economy is supposed to be in a recovery phase but you would never know it from commodity prices, which continue to fall. The best assessment is that decisions to increase production, made when the economy was stronger, have resulted in new products arriving to a weaker market. All sectors are affected, including iron ore, oil and shipping vessels.

Dry Cargo

Iron ore, oil and shipping vessels are all affected from global economy

Australian 62%-Fe iron ore, an industry benchmark, fell to its lowest point in two years. It is down to $88 per ton, a total drop of 35% for the year. This is one example of how the increased global supply is affecting commodities.

A secondary factor is the stagnating Chinese market, where steel production slowed considerably and inventories are high. Current government policies have not been able to improve the situation. Case in point is the government’s reaction to a housing bubble which began in 2008 with a stimulus package, driving up debt from 140% of GDP at the end of 2008 to 250% by the middle of this year. BHP, Rio and Vale, the largest three iron ore miners, have responded by curtailing investments in new production, but it will take some time before this helps the situation.

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Overall, Dry Bulk Market Indicators Are Positive

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Iron ore and coal prices continue to be affected by China’s markets

Coal bituminous

Coal producers such as China and Indonesia are in various stages of new taxes, regulations and licensing

China’s demand for iron ore remained slow this past week, causing a drop in iron ore prices to 89.01 USD/ton, a low point for the year. At the same time, iron ore production has increased, hitting record levels. The lower prices precipitated an increase in imports, as importers were quick to take advantage. However, due to low producer demand, iron ore is sitting in inventory, driving up inventory levels to 109.3M tons in just the last week. A further drop in iron ore prices is expected, good news for Chinese importers who will continue saving money.

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BDI Not Recovering This Summer

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The Baltic Dry index continues its rather depressed performance, in spite of a small 4% gain. Leading indicators, Capesize and Panamax sectors, demonstrate a stagnant market at the moment. Capesize rates were stuck at $8.5k and Panamax at $5k. Only Supramaxes saw some improvement, with a 10% rise in rates. Thus far this quarter, Panamax spot rates are more than 60% year to date. A primary cause is China’s declining coal imports, down 4% from this time a year ago. Industry analysts are holding out for some improvement in the fall and fourth quarter of this year resulting from the typical upswing in electricity use in China during the summer months, which should result in more coal usage and a depletion of current coal stockpiles. However, at the same time, electricity producers have been pushing for less coal consumption, prompting imports of cleaner, more energy efficient coal. Their timing is excellent as current global prices for coal are dropping, which is impacting shipping vessel freight performance. Iron ore shipping is doing a bit better, showing good strength with 145 spot Capesize charters in this last four-week period, an increase of 4 charters from the previous four weeks. The winner here continues to be Australia which is succeeding in squeezing out other countries. For instance, over the first weeks of August, Australia sent out 17 charters while Brazil sent only two.

Dry Bulk Market has Failed to Live Up to its Optimistic Expectations

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steep drop in iron ore prices

Steep Drop in Iron Ore Prices

Forecasters expected a robust performance in the dry bulk shipping market for the second half of 2014, but a market recovery has failed as of yet to materialize. A number of less than favorable variables have eroded those early predictions. Factors such as a steep drop in iron ore prices, by as much as $40 per ton since the year’s start, were thought to increase iron ore movement, but record-breaking stockpiles of iron ore at China’s ports and Australia’s emergence as a pre-eminent iron ore supplier have precipitated a steady decline in BDI. By mid-month, BDI was down by 10% standing at 732 points, continuing its slow decline. Shipping vessel rates followed suit, with the Panamax below $5kpd and Capesize below $9kpd. Australia’s spot charters are up by 31% from the same time a year ago, negatively impacting the performance of Brazilian and other shipping countries. Adding to the fire is China’s decreasing coal imports and growing coal stockpiles, such as at Qingdao port where stockpiles are up by 47% from the beginning of the year. Chinese regulators have tightened up trade financing regulations, negatively impacting the performance of Panamax and Capesize, with year to date losses of 68% and 78% respectively. A weakened Chinese housing market is also not helping. Continue reading

Iron Ore Prices Tumbling in 2014

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To date, the 2014 iron ore price indicators are less than optimistic. Iron ore prices have fallen to a low of $89 per metric ton earlier this year, before bouncing back to $90s, but still off substantially from iron ore price highs, down more than 30% from the not so distant past.

Many factors are weighing in to contribute to this rather lackluster performance. The Asian steel industry, most prominently China’s has slowed down. China’s steel output grew only 5% over the first four months of 2014 compared to the same period in 2013. This is a significant drop from the 9% growth experienced in the first four months of 2013 compared to the first four months of 2012. At the same time, while the demand has fallen off, iron ore production has increased compounding the pricing weakness.

China's steel market is improving, and demand is picking up

China’s steel market is improving, and demand is picking up

Australia is the world’s leading supplier of iron ore, followed by Brazil, with a total of 76% of the world’s iron ore supply between them. Following behind are Sweden, Canada and South Africa. In 2013, of the total global shipments of iron ore, 85.5% headed to Asian ports. China received the most, with 66.9% of total imports, followed by Japan, South Korea and Taiwan. So, a slowdown in these markets has significant impact on the movement of iron ore product. Also, with Australia as a leading supplier, and its close proximity to the Asian ports, this means shorter shipping routes, which does not contribute to the tonne-mile multipliers that drive up shipping rates.

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No Longer Under the Onus of a Mining Ban, India Is Set to Maximize Its Iron Ore Production

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India has a strong history of being a world leader in iron production and exports

India has a strong history of being a world leader in iron production and exports (image by Soman from Wikipedia)

India is one of the world’s leading producers of iron ore. However, a court-imposed ban on mining from the state of Goa, one of the most productive export states in the country, caused a significant drop in India’s output of iron ore. The ban was instituted more than 19 months ago on mines in Goa, Karnataka, as well as other states, to deal with problems of illegal mining. Mining production was capped at 20 million tons. Last month, the Supreme Court lifted the ban and iron ore production is expected to soar to 284Mt in 2020. This represents significant increase from the 142.9 million tons produced in 2013.

India has a strong history of being a world leader in iron production and exports. It benefits from rich iron ore resources, with more than 28.5 billion tons of magnetite (Fe304) and hematite (Fe203) located primarily in eastern and southern India. There were 336 mines in 2010. This number fell to 294 in 2012, during the time of the mining ban, of which 260 were privately owned and 34 were owned by governmental entities.
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Hope for capesize freight rates as steel demand in China continues to grow, keeping shipments of iron ore high as market and industry expecting rates to improve for 2nd half 2014

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After April’s rather discouraging picture for Capesize rates, shippers are happy to see some significant improvement this month. The demand for steel in China continues to grow, resulting in improved margins for domestic steel mills and pushing up crude steel production to 832m tons, record levels. Iron ore stocks of 110m at ports were giving much cause for worry but now that iron ore inventories at the mills have hit record lows, fears have eased considerably. Imported iron ore prices have fallen by 8.4% and HRC prices have risen by 1.7% MoM. The picture for grain shipments from South America was fairly abysmal in the first quarter. Argentinian exports were down 35% from the same time last year, to less than 10mt, with cargoes remaining at ports. All of this pushed down Panamax rates, which remained weak at $7kpd. Nevertheless, market analysts expect grain shipments to increase, contributing to an optimistic outlook for second half 2104 within the industry. 
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Volatility in economic and political markets – Concern or Opportunity?

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price fluctuation game

For traders playing in the short-term price fluctuation game, where the goal is to reap fast profits, the current world situation is actually more of a plus than of concern

The best one can say at this time is that worldwide economic markets are volatile, with no certain way to predict what will be the immediate and long-term fallout from civil unrest in Ukraine, Russian grab of Crimea, economic slowdown in China and falling stock markets. With the potential for more unrest in the world as the US and Russia sanction each other, the best advice seems to be to hold steady and wait for the various disturbances in trading and prices to settle down. For traders playing in the short-term price fluctuation game, where the goal is to reap fast profits, the current world situation is actually more of a plus than of concern.

Mid-March indices were already showing the impact of the various political and economic instabilities, with the FISE down by 4%, Eurofirst down 4.2%, Shanghai down 2.8%, Nikkei down 3.2% and the S&P down 1.9%. The commodities picture was also interesting, with iron ore trading off by 10.3% and cooper by 9.2%. Brent crude oil was trading down by 3.6% but gold was trading up by 3.1%–with many more worried about China’s slowdown than what will happen between Russia and Ukraine, at least from an economic perspective.

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Summary of First Two Months of 2014

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Iron IndustryChinese imports, a barometer for assessing iron ore, fell by 30% in February of this year, to 61.2 million tons. The first two months of 2014 were better than the same time period a year ago, but February numbers are at the lowest level since March of 2013. Following suit, iron ore prices have also fallen from $135 per ton at the beginning of the year to its current level of approximately $105 per ton. The falling price of iron ore has reignited the Chinese appetite for importing iron ore, and stockpiles at Chinese ports are climbing again reaching 99mt, versus an all-time high of 101mt in 2012.

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Indicators are mixed, but markets look to be holding steady or slightly improving

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ISM report 2014A January ISM report on manufacturing and the overall state of the economy caused a sharp reaction on Wall Street, resulting in a steep drop in the stock market, The ISM’s new orders index for the manufacturing sector fell by 13.2 points, reaching 51.2 points in January, the steepest tumble since December, 1980. The JP Morgan Global Manufacturing PMI showed a small decline in January, going from 53.0 points in December to 52.9 points in January. However, anything above 50 points is a good indicator of an expanding market, albeit at a slow pace. The PMI reflects industrial production around the world, so all in all, worldwide markets appear to be in good shape.
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