It is no secret that the Capesize spot market has struggled to reach sustainable profitability over the last few years, reflecting a number of unexpected events let alone a global pandemic that has wreak havoc on the global economy and as a result on global trade. Yet, under the surface, there has been a number of changes in how the market operates that have had a profound impact on the spot Capesize market along the way. Although the anticipated runup in iron ore exports out of Brazil in the next several years and the very low existing orderbook should still support sequential improvements in average freight rates, the Capesize spot market has shrunk considerably, and as a result, more and more spot Capesize vessels are available for hire at any give time versus recent history.
To begin with, spot fixtures for Capesize vessels (170,000dwt-180,000 dwt ships) out of Brazil are currently running at the lowest level in at least a decade (red line in the chart). That follows a similar path last year (black line in the chart) and this by itself is having a major impact on the spot market as it reflects lower demand for spot Capesize ships for the long-haul Brazil-China iron ore trade despite the improved overall exports.
Spot Brazilian Capesize Fixtures
Source: Commodore Research
Now, this is to be expected: In 2019, a major dam accident threw Vale’s iron ore production and exports into a tailspin, and as a result, Capesize chartering demand declined. The Brumadinho incident continues to affect Brazilian iron ore exports to this day, and as a result, exports remain below capacity rate. But it is not only Brumadinho. In 2015, another dam rapture led to the stoppage of Samarco’s pellet exports (yet to resume) while a similar incident in a pipeline in Anglo American’s Minas-Rio project also led to a temporary export stoppage in 2018. Although gradually the above incidents have and are currently being restarted, the impact on exports, and thus shipping demand, has been significant.
And indeed, the spot market has suffered quite a bit. Spot fixtures out of Brazil are currently running way below the historical average levels, and even during times of peak demand this year, spot fixtures have failed to surpass the historical average.
Source: Commodore Research
But it is not only lower exports that is having such a considerable impact on the spot Capesize market. In the last 3 years some 30+ Very Large Ore Carriers (VLOC) and more than 25 Guaibamax carriers (vessels with a carrying capacity of about 325,000 dwt, the maximum size for the Guaiba Island loading terminal in Sepetiba Bay, southern Brazil) have been delivered. Such tonnage is directly controlled by Vale and is the first choice when it comes to iron ore transportation by the major miner due to the vessel’s economies of scale. Although actual ownership is not tied to Vale, such tonnage can be thought of a dedicated ships for Vale’s own use. The impact on those additional monster-size vessels to the traditional spot Capesize market has also been significant.
Estimating such impact of lower exports and higher VLOC and Guaibamax capacity to the Capesize spot market is a tricky exercise. Based on various assumptions about destination, speed, loading capacity and other elements, we believe the significant drop in spot Capesize fixtures can be almost totally explained by these two factors. As the chart below shows, accounting for the lower exports and higher dedicated tonnage capacity, the spot Capesize market is basically in line with our estimates:
Where does the above leave the ever important spot Capesize market for the years ahead?
Well, it all depends on the speed and magnitude of Brazil’s export capacity increase. With Vale’s plans for some 450 million tons of export capacity in the foreseeable future and with a limited orderbook, the spot market can resume growing from current levels and even surpass the highs of 2018. Such improvement will of course be gradual, but still we expect the spot Capesize market to be bigger next year versus 2020 and remain in such a growth trend for the next 2-3 years.
Finally, it is not surprising that spot fixtures have declined based on the analysis above. What is surprising is that Capesize rates have remained relatively resilient (yet not where owners would like them to be) given the ever shrinking spot pool. Such a trend should provide a lot of hope to the Capesize market: As exports out of Brazil continue to increase aided by China’s implied strategy to diversify iron ore supplies away from Australia, the growing spot market might push Capesize rates even higher for the years to come, thus providing some much needed optimism for dry bulk owners.