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.
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.
Geopolitically, many areas of the world are unstable, yet oil prices are on the decline, which seems to defy logic. Supply from Iraq, Libya, Nigeria and Syria are non-existent. Almost weekly, there are new sanctions against Russia and Iran. Nevertheless, consumers are still not feeling the pinch of escalating prices at the pump. Why not? It appears that in the midst of a general slowdown in the economic markets of emerging countries and more fuel efficiency in developed countries, the US shale oil technology has blossomed. This has caused a boom in US crude oil production, which has grown 65% over the past six years. Therefore, the entire health of the oil industry is currently resting on a strong US economy, which if it fails, will bring down the entire cart and oil prices will soar.
The shipping industry is also affected by these developments. Availability and prices determine shipping volumes, and the cost of vessels. A slumping market results in less shipping and higher shipping rates. Industry insiders are pinning their hopes on Brazil’s ability to increase their ore output, going head to head with Australia, thereby lowering prices.
Dry Bulk S&P
August closed out the summer on a high note with increased buying and selling of assets as the market continues to improve. The market has reported Bulkseas, Magna and Apollonia Lines all competed on the Golden Kiju which was eventually sold for roughly $19.5M. The Chinese vessel Zhushui sold for $20.9M, although it was listed for $23.8M in the spring. Many buyers are sitting out, as they hope to time the bottom of the market’s fall and then pick up the cheapest deals they can before the year is out.
Dry Cargo Charters
The Cape market finished out the month of August on a high note, with charter earnings reaching $17,980. The Atlantic Panamax market continues to tighten. LME vessels were fetching $8,000 for rounds in the Baltic. The market is benefiting from the slow infusion of new business, especially from the Far East. The ECSA market has been holding strong, due to the steady shipments of grain and iron ore. Pacific rates are not performing as well, but some turnaround may be in store as interest in Indonesian routes begin to increase.