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Chart 1:<span/> Capesize
freight rates spiked to 12 years high since 2009
At the end of September, Capesize timecharter rates have
increased by 85% to about $75,000/day from about $40,000/day just
three weeks ago. Specifically, C5 (Australian iron ore to China
route, 170,000mt) freight rates increased from about $12/ton(8/Sep)
to about $23/ton(29/Sep). The increase has almost doubled up within
less than one month and Australian miners need to pay about $1.8
million more per Capesize shipment compared with the rates before
the Mid-Autumn Festival, according to Baltic Exchange.
We believe this dramatic increase in the Capesize rate has been
primarily due to the tightened supply of vessels owing to high
congestion in the Pacific and limited ballasters in Atlantic while
the recovery in Brazil's iron ore shipments and strong coal demand
also play a role in the current strength in freight rates. Our
forecast models consistently predicted the strength in Capesize
rates over the last few weeks and recently available signals have
indicated freight rates to remain strong in the short term. (See
previous article: Capesize market will overall remain
strong in the coming months despite China's steel production
curb, 20 August 2021) However, we still remain cautious toward
the end of the year as downside risk remains in iron ore demand
from mainland China, potential loss in coal market share to the
Panamax sector, and expected decline in congestion as vaccination
rollouts progress.
Background
Initially, two weeks ago, strong Atlantic mineral chartering
demand against limited tonnage helped to support the Atlantic
rates. For example, on 10 September, the Baltic C8 (Capesize
Atlantic Round Voyage rates, $/day) reached about $60,000/day after
spiking almost $10,000/day in single day, whereas Pacific remained
at the level of about $40,000/day. Therefore Pacific and Atlantic
round voyage earnings spread has increased to 50%, equivalent to
more than $15,000/Day.
Chart 2: Capesize congestion rebounded and remained high in
mainland China following typhoon Chanthu
While the higher regional freight spread environment has
continued, Capesize congestion in China sea has rebounded again in
recent weeks following typhoon Chanthu, and this reduced the number
of open tonnage out of mainland China. The combination of
competition and limited prompt tonnage, triggered Australian miners
to pay up almost twice more than their early September rates in the
Pacific in order to secure tonnage for their October shipments.
They had to match the Atlantic rates to attract tonnage before
committing ballast.
Chart 3.: The freight component percentage(%) against CFR iron
ore prices remained low, less than 20%
From iron ore trading perspective, although iron ore prices (CFR
Qingdao) dropped significantly hitting a 10-month low, iron ore
shipments have remained strong so far, as steel mills interest in
maximizing their profit with low steel resource cost input
maintained appetite on imported iron ore in mainland China before
the expected cut in steel production over the winter period.
More importantly, the freight component percentage (%) against
CFR iron ore prices remained low enough for miners to pay premium
freight to secure tonnage (see chart 3) as miners have tried to
sell available cargo before iron ore prices drop further. While C5
has increased $10/ton over the last three weeks, CFR iron ore
prices dropped more than $20 over the same period. Technically, $10
change in iron ore CFR prices could mean approximately $50,000 in
time charter rates.
Moreover, there has been a lot of speculation on the negative
impact with the news of steel production cuts in mainland China and
the Evergrande default rumors. With unexpected spike in freight
rates, many short position players either in FFA or physical have
no options but to cover their short position in FFA market or
secure tonnage to cover their cargo requirement, triggering more
upside demand in the short-term.
Outlook
Chart 4.: Stronger seasonal iron ore shipments with limited
available tonnage in the Pacific have driven freight rates to
spike
Source: IHS Markit Freight Signal Monitor - Freight Rate
Forecast & Commodities at Sea
From demand perspective, Iron ore shipments this year have been
in line with seasonality (see chart 4). The third quarter and early
fourth quarter are normally the seasonal peak in Brazil, Canada,
and South Africa; thus, volume of iron ore exports will remain
strong in coming weeks. Also, coal shipments are expected to remain
strong both in Europe and Asia, with extremely high natural gas
prices and low level of stockpile around the world. From a supply
point of view, prompt tonnage supply from mainland China remained
limited with ongoing congestion. Also, stronger Australia
chartering demand has reduced ballasters towards Brazil and this
would trigger another spike in the Atlantic region. Therefore,
strong iron ore and coal shipments along with limited available
tonnage both in Pacific and Atlantic will continue to support
current high freight rates in the short-term.
However, we remain cautious toward the end of the fourth quarter
of 2021 and do not foresee the recent momentum in Capesize freight
markets to last longer.
IHS Markit freight forecast models predict October would be the
peak of 2021 based on several downside factors (a) with the Beijing
winter Olympic games in early February, we believe mainland China
will try to concentrate the steel production cut leading up to this
period; (b) with Capesize freight rates becoming more than twice
that of Panamax vessels, we should begin to see more of the
increased coal cargoes being performed on Panamax tonnage
especially with slower demand from grain side; (c) and most
importantly, the expected decline in Capesize congestion with a
recovery in moored operations would reduce premium caused by prompt
tonnage tightness.
From a technical perspective, if the freight trend followed
historical movements, after initial short-covering driven spike,
C5TC would face resistance of previous peak in 2009
($90,000-100,000/day) or C5 ($25-26/ton), and then it could drop
again with profit taking movement from FFA players as well as
shipowners and operators as the current very high spread between
C5TC and P5TC is not sustainable. (see chart 1)
Freight Signal Monitor and Machine Learning
Model
IHS Markit maintains the view that there is still upside
potential in the short term with many signals pointing to better
demand and supply balance with tonnage tightness, mainly due to
high congestion in mainland China and limited Brazil ballasters,
while downside risk remains in the medium term with weaker economy
and commodity sector demand signals along with expected decline in
congestion.
Our machine learning C5TC forecasts models also support our
view. October 2021 average is predicted to be higher than September
2021 average ($54,311/day) but lower than spot rates ($80,877/day,
5 October 2021) even with high case prediction, indicating spot
rates will peak in October and decrease rapidly afterwards.
(As of Monday, 4th October 2021) IHS Markit ML models' weekly
C5TC base case forecast for October 2021 settlement is within the
range of $68,734-$77,368/day (with potential maximum rates of
$83,835/day and minimum of $58,358/day) and November 2021
settlement will projected to be lower than October with the range
of $45,140 - $69,177/day.
For more information on the product used in this analysis:
RT @IAPHWorldPorts: At #IAPH2022: @WorldBank's Dominik Englert: "we see a future for ammonia and hydrogen as bunker fuels, not for LNG" htt…
May 17
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