2020 was a disastrous year for the world, to say the least. With the pandemic wreaking havoc in societies and economies, the world was battling so many fronts at the same time and even today with the potential massive vaccinations about to begin, the future remains highly uncertain. For dry bulk shipping however, it was a decent year despite all the obstacles, as China once again proved a safe harbor for dry bulk demand. Yet, it was not smooth sailing across the board.
Capesize rates, that probably will end up averaging around 13,000 for the year, had a rough first half and the annual average looks better mainly due to a relatively short term spike in the summer that pushed spot rates towards the high-30,000 level. Although the Australia to China trade posted new highs in terms of volumes on the back of extremely strong iron ore prices, Brazilian iron ore exports remained depressed. In fact, Brazilian iron ore exports are back to the early 2010’s levels, which is quite astonishing given the impressive growth in the global iron ore market over the last decade. Australia at the same time, has seen iron ore exports almost doubling, with the major miners pushing towards the 1 billion-ton mark sometime in the next several years.
The natural question is how reliable are the predictions for significant growth in Brazilian exports over the coming years that Brazil’s largest miner, Vale, recently forecasted and what that means for the iron-ore-focused Capesize market.
Running the risk of been fooled once again, we will accept for now the argument that indeed Vale is on its way to achieving 400 million tons of production over the next 2-3 years as recently stated in company’s annual meeting (Vale Day). On the surface, such a target looks achievable. After all, it was only just two years ago that Vale was producing close to 370 million tons, versus the 300-305 million tons that they will probably produce this year.
If that is the case, what does that mean for Capesize demand over the next two to three years?
Not all ships are created equal and more importantly, not all ships can call and load in every port. Size is the most significant determinant on the operational capabilities of a ship, and to understand the dynamics of the Capesize market going forward, one has to include the framework of Vale’s logistics and port infrastructure to that discussion as the company attempts to grow its production and exports materially.
In its most recent presentation, Vale put forward a roadmap to 400 million tons, providing more details on where the additional growth will come from across its mining system, as illustrated in the following slide:
Source: Vale
Based on the above, most of the estimated growth will be coming from the Southeastern and South systems over the next several years, with the additional volumes accounting for 65mt out of the projected 80mt by 2022, or ~80% of estimated growth. Vale’s port of Tubarao is the main venue for the Southeastern system while Guaiba and Itaguai are the main export ports for the Southern system.
Each of those ports have different capabilities when it comes to vessel loading, based on maximum size accepted on each pier, as each port operates multiple loading piers. This is important, because in order for Vale to maximize its exports it has to maximize port utilization. After all, a ton of iron ore mined but sitting by the port does not do much if its not sold, loaded on a vessel and shipped.
If most of the growth is coming from the South/Southeastern system, how well are these ports equipped to handle such an increase in vessel loadings? Additionally, what type of ships will be needed in the future in order to handle such a potential surge in exports?
During Vale Day, Vale’s management presented their view on the utilization of the large, dedicated dry bulk vessels that Vale uses, namely Valemaxes and Guaibamaxes (name refers to the maximum size that Vale’s Guaiba island terminal accepts). Those vessels have respective capacities of ~400kdwt and ~325kdwt. Currently there are 68 Valemaxes in the water. Furthermore, there are 24 newbuilding orders for Guaibamaxes with delivery dates between now and early 2022. It is also important to note that Guaibamaxes make approximately 30% of the total Capesize orderbook (there are only 90 standard Capesize vessels in the orderbook, a very low number compared to recent history).
Why are all these details important?
Well, if most of the incremental volumes are coming out of the South/Southeastern system, the question is whether those ports can handle the larger vessels that Vale prefers to use due to economies of scale or there will be an increasing need for standard Capesize vessels, thus leading to higher demand for the standard Capesize segment.
Based on Vale’s published information, the port of Tubarao has only one birth capable of handling ships larger than 200,000 dwt (out of four total piers). Any increase in exports out of Tubarao will naturally lead to increasing demand for standard Capesize vessels. The Southern ports have the ability to absorb most of the newbuilding Guaibamax vessels (Guaiba can handle two 325,000 dwt vessels at a time) but that covers only about 35% of the estimated incremental volumes. In general, although capacity-wise Vale’s ports have the capacity to handle the additional volumes and could potentially transport some 40% of its 2021 exports using Valemax/Guaibamax vessels, we believe the actual amount moved on dedicated tonnage will be lower due to port handling limitations, especially for the Guaibamax ships that will see lower utilization due to port constraints (we also believe that contrary to Vale’s calculations, Valemaxes can not transport more than 90 million tons per year versus the company guidance of 100mt due to port inefficiencies, drydockings, loading/discharge times, etc.).
The chart below shows what Vale believes the future carrying capacity of Valemax/Guaibamax might look like:
Source: Vale
Our view is that standard Capesize vessels will be in high demand, despite the sizable orderbook of Guaibamax vessels. Valemaxes indeed have the ability to distort the market as they have done during the last few years, and will be able to transport some 25% of Vale’s exports in the foreseeable future. An additional 25% of Vale’s iron ore exports will be transported using vessels with capacity of 250kdwt and 350kdwt (including the Guaibamax fleet). The rest, some 50% of total, will be moved using standard Capesize ships.
Based on such analysis, Capesize spot fixtures will once again begin to increase after reaching a multi-year low in 2020, reaching new highs in 2023 as Vale’s exports increase towards 400 million tons. We don’t anticipate any increase in Valemax loadings (after all, the newbuilding program is complete) while VLOC/Guaibamax loadings will increase in 2021 but then beggin to flatten out (also, there have already been retirements of several VLOC vessels and we expect more in the future which should offset part of the Guaibamax additions).
Finally, all the above assume Vale will deliver on its promises. This is a big if, and indeed we have been fooled year after year. Unfortunately, the health of the dry bulk market, (especially the larger segments) rely on the ability of this specific company to deliver, given the large distances and quantities involved.
There is another element on the above (hopefully we will cover it soon here) that has to do with the new environmental standards and CO2 emissions reduction that Vale aims for. Our initial calculations show that Vale’s controlled fleet (Valemax and Guaibamax) will need to gradually slow down in terms of sailing speeds in order to reach the CO2 emission standards that the company has already set for the next several years (given the corresponding EEXIs and the relatively high speeds Valemaxes have been operating). If that is the case, and this is yet to be determined, then the market will further tighten beyond the volume-driven increase, as Vale will need more standard Capesize ships from the spot market in order to achieve its stated production and export goals to reach the 400mt level sometime in 2023.