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At the start of October, Capesize (180,000 dwt) timecharter
rates increased to about USD30,000/day from USD15,000/day from just
two weeks ago. The increase has almost doubled within half a month,
according to the Baltic Exchange.
Strong Atlantic mineral chartering demand helped to support the
Atlantic rates again, for example the Baltic C8 (Capesize Atlantic
Round Voyage rates, USD/day) spiked almost by 300% to USD36,400/day
(1/Oct) from USD12,725/day (17/Sep), whereas C9 (Capesize iron ore
shipments from Canada to Asia, USD/day) routes jumped to above
USD50,000/day from about USD30,000/day two weeks ago.
Now, Pacific and Atlantic round voyage earnings spread has
increased to 50%, equivalent to more than USD10,000/Day. Therefore,
if Australian miners tried to secure tonnage for their October
shipments in the Pacific, they may need to pay up almost twice more
than their September rates in the Pacific to match the Atlantic
rates.
From a demand perspective, IHS Markit notes good demand
recovery. Iron ore demand flow from Brazil - as well as Ukraine and
Canada - has nearly reached a similar level to shipments in July
(when the C5TC spiked above USD30,000/day). Moreover, Guinean
bauxite is likely to recover in the fourth quarter from the
disruption of the third quarter due to the seasonal weather issue.
Demand for Indian coal is also recovering although China is still
under tight import control.
From the supply side, we observed limited ballasters to the
Atlantic Basin owing to weaker Atlantic rates than Pacific figures
over the past two months (see the spread in chart 2). This
tightness would support Atlantic rates in the near future. However,
we also observed increased tonnage heading to the Indian Ocean.
According to IHS Markit's high-frequency cargo and fleet analytics
tool Commodities at Sea, the number
of Capesize vessels heading to west of Singapore has increased to
80 vessels (including 15 very large ore carriers [VLOCs]) in week
40 from the average 65 in September. (see the trend - cargo group
in chart 1)
Interestingly, this time increased coal cargo shipments to India
has provided faster Capesize tonnage in the west of Singapore.
Therefore, once those vessels heading to Indian waters becomes
available tonnage for the Atlantic market, it is expected to face
adjustments in the freight market - similar to what we have seen in
July 2020 and in September 2019.
The IHS Markit Freight Rate Forecast models
have predicted higher earning for Capesize in October compared with
September. This is mainly driven by higher demand indicators, which
includes stable Chinese PMI index and stronger iron ore and bauxite
cargo flows, as well as supply indicators, including the number of
Indian Ocean ballasters.
Our weekly Capesize 5TCs forecast models have also consistently
predicted higher freight in October compared to September whereas
FFA assessments showed similar rates between September and October
2020. As of 1 September 2020, a month ago, our C5TC prediction
showed October 2020 average settlements forecast to be USD
6,000/day higher than the September average. (see the green bars in
chart 3).
However, we still remain cautious towards the end of the fourth
quarter of 2020. IHS Markit models predict October will be the peak
of the fourth quarter.
From a technical perspective, if the freight trend followed
historical movements, C5TC would face the resistance from the 2020
peak (USD34,000/day) or 2019 peak (USD38,000/day), and then it
could drop again with profit taking movement from FFA players as
well as shipowners and operators.
From a fundamental perspective, iron ore and coal demands are
forecast to be under pressure because of import controls and
environment regulations. Many countries have started announcing
their winter regulation on coal consumption and on steel and metal
smelters to tackle air pollution. Furthermore, we note there is a
very high spread between Capesize and Panamax. Many Capesize coal
are switching to Panamax shipments and the recent, declining
congestion trend in China would increase overall supply,
specifically in the Pacific.
Moreover, IHS Markit economists do not foresee the recent
momentum in commodity markets to last. Once inventory restocking is
complete, growth may fade, thus exposing some markets to a price
correction. With the US presidency election coming, this
uncertainty could increase the risk of commodity prices correcting
in the near future, if our view of the fundamentals is correct.
In conclusion, IHS Markit maintains the view that there is still
upside potential in the short-term, while downside risk remains
towards the end of 2020.
