By Mark Nugent
The Big Picture: Capesize rebound
Finally, some support
The Capesize market has seen a steady rebound over the past couple of weeks owing largely to a better demand picture as we look to Q2. We look into what is driving this demand and how it may develop in the next few months.
The Baltic 5TC Capesize average increased by 7.3% to $13,783/day today in what is the 14th straight day of gains for the big ships. In mid-February, Capesize earnings hit their lowest level since May 2020 at $2,246/day, and it appeared no relief was in sight.
Sentiment has largely flipped to a more positive tone following a week of a strong reversal in FFA prices with demand starting to pick up and the release of encouraging economic data in China. The National Bureau of Statistics posted a better-than-expected Manufacturing PMI of 52.6 in February, signalling expansionary conditions for factory activity in the country, the highest level since 2012. Demand on the Capes has started to improve now that several headwinds have passed (or eased), such as Brazilian weather woes and maintenance work in Western Australia, which saw a week in which the Aussie miners ship their lowest volume of iron ore for several years. At their current pace, iron ore shipments in March are now likely to outperform those of last year in both Australia and Brazil.
Brazil shipments bottom out
While it has been a slow start to the year in Brazil, as is typically the case, volumes have started to improve and daily average shipments have shown a likely bottom for the year, bar any major disruptions. Average daily shipments are now solidly above the levels of the same time last year with the 14-day moving average now over 1m tonnes, compared to below 800k in March 2022. Given the recent upward trajectory rates have been on, the reversed sentiment in the FFA market has led to some owners which still have plenty of time in ballast before arriving in the Atlantic, to hold off securing employment to potentially realise better earnings in the near-term hence fixtures have been sparsely reported. As such, bid/offer spreads for these trips have started to widen but concluded deals have held firm.
At the same time, several lofty weeks for vessels ballasting past Singapore indicates volumes from Brazil (and West Africa) will need to continue its momentum in the next few weeks in order to sustain these levels. Bauxite liftings on Capes in West Africa remained in yearly growth territory again in February, at 8.6m tonnes. This as Colombia and South African Capesize volumes have started to slow, both declining by 32.0% and 20.4% YoY in February. This can, in part, be easing coal demand in Europe as energy supplies are ample and gas prices have declined significantly.
China demand improving
As we mentioned above, the Chinese demand picture appears to be gradually improving. The PMI print has added confidence in its economy, particularly as the country enters its seasonal peak in construction activity. Further, the value of new home sales showed its first YoY increase for more than a year in February at $67bn according to Bloomberg, albeit from a low-base. Dalian iron ore prices have climbed by 12.5% YTD, while rebar prices on the Shanghai Futures exchange have increased by 7.4% over the same period, the highest level since June.
Capesize liftings bound for China increased by 7.4% YoY in February to 91.9m tonnes and is the highest volume lifted by the big ships in February on record. Leading up to the National Party Congress last week, many primary industries in China were subject to power rationing and had to cut operating capacity. With this now lifted, steel (and aluminum) producers can start to increase output looking towards Q2, which should support iron ore and bauxite demand. The factors above do suggest the worst in China has passed, which is supportive for the Capes given these vessels’ exposure to Chinese demand. With the Chinese government re-iterating it will not resort to mass-stimulus measures, we do however still believe we will see more of a gradual improvement in the country’s demand as we are seeing today, compared to a sharp recovery as during 2020.
Australia queues rise
In early February, weekly iron ore shipments from West Australia totalled just 12.4m tonnes for the week ending 6th February, the lowest level for over a year. Much of this can be attributed to planned maintenance and a brief halt to rail services to Port Hedland. More recently, however, volumes have bounced back to healthy levels, with the Aussie miners shipping 16.9m tonnes of iron ore last week. The delays earlier in the month are one factor that have added to a backlog in vessels which have driven up Capesize port queues in recent weeks, peaking at 13.1m dwt in Australia. Another factor is owners taking the decision to do a shorter-duration C5 voyage for the time being, and then potentially opting for the ballasting routes thereafter at a time of better earnings as the forward curve is currently suggesting.
Current queues now lie at 11.3m dwt, while below recent-highs, lie 15.2% above the 5-year average. On coal, the reversal of the Chinese ban has yet to provide any significant support to Capesize employment, at just 1.3m tonnes loaded on this trade in February. Going forward, it remains to be seen what volume this trade will ramp up to as the country is well-supplied for the fuel already.