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Capesize market will overall remain strong in the coming months despite China’s steel production curb
20 August 2021
Abigail Mott, Senior Research Analyst, Maritime
& Trade
The coal market will be an influential factor in the coming
months for the Capesize market. Capesize vessels have gained a
larger share of the Indonesia-India coal market this year and have
become the predominant carrier on this route. In the coming months
when India starts importing coal again we expect to see an increase
in Capesize coal shipments. Over the previous week we have seen the
C5TC rate push further. With strong demand for Panamax vessels for
Indo-China routes and Black Sea grain business, the Capesize market
had previously been trapped in an unnatural negative spread with
Panamax market. However, now in recent weeks Capesize freight rates
have soared above Panamax and triggered the much-needed correction
in the dry bulk market.
In July we saw 31.6 MMt of iron ore exported from Brazil. The
first eleven days of August have a calculated 30-day pace of 28.9
MMt. This is notably lower than the forecasted volume of 34.4 MMt
iron ore/pellet shipments for August, indicating more iron ore will
be exported in the 2nd half of August. Forecasted Brazilian iron
ore shipments for 3Q21 have been revised down to 100-102 MMt with
the news of steel production curbs in China. Although total exports
may be lower than expected during this quarter, they are still 5%
higher than the previous year. In previous years Brazilian iron ore
exports have peaked around 35 MMt a month. Indicating the latest
forecasted export volume for August is close to full capacity for
Brazil.
Chart 1: Brazilian iron ore exports seasonally soften in
July
The other major exporter of iron ore, Australia, also showed a
slowdown in exports in July in line with previous years
seasonality. Australian iron ore exports in July totalled 74.3 MMt,
a 9% drop from June's exports of 81.9 MMt. Similarly, to Brazil,
Australia commonly exhibit slower exports in July in conjunction
with the new financial year. The current calculated 30-day pace for
Australian iron ore exports is 78.1 MMt.
In terms of supply, ballasters to Brazil look to be much lower
than previous years, see chart 3. With fewer ballasters to the
region, a squeeze on supply should help to counteract the negative
impact of reduced exports. Furthermore, the recent typhoon in China
has resulted in a backlog at Chinese ports, Capesize congestion in
China has spiked again and almost to levels seen earlier in the
year, reducing the tonnage profile in the Pacific.
Iron ore prices have been dropping since China released fresh
news of steel cut enforcements and have now reached a three month
low. Although this is not unusual for the Chinese Government to
intervene and to try and impose restrictions on steel production,
firmer guidance has been issued to restrict steel production in the
second half of 2021. However, there is still a lack of clarity over
production which has resulted in steel mills pausing their iron ore
procurement strategy. Lower steel output and strong demand will
increase steel margins, it is likely therefore that China will show
preference for higher grade Brazilian iron ore to maximise output.
In the longer-term decarbonisation and environmental demands will
in fact benefit high-grade Brazilian iron ore export growth.
Later in Q3 once the monsoon season has eased, India will begin
to buy coal and imports from Indonesia should increase. September
2020 was one of the strongest months for coal India's coal import
programme. Capesize became the predominant carrier for Indo-India
cargoes in 2021 at the expense of Supramax and Panamax shipments.
With vaccination uptake progressing throughout India, imports
should come back online later in Q3.
However, our previous assumption that Capesize would take a
larger share of the Indonesia-India coal trade was based on
Capesize being a more attractive option to export coal than
Panamax. Now in the Pacific, Capesize freight rates are just shy of
1.5x higher than the Pacific Panamax routes. We would expect
Capesize to take a larger share of the coal market from the smaller
sizes when the Pacific Capesize market TC rate is less than
$40,000.
Pacific routes could come under pressure if China prioritises
exports from Brazil over those from Australia. With Pacific Panamax
routes performing well, any negative pressure put on the Capesize
vessels in the Pacific from fewer Australian iron ore cargoes could
be lightened by an increase in short Indonesia-India options.
Downside risk still exists if the monsoon season delays and any
fresh new Covid-19 restrictions are enforced.
In summary, we maintain our bullish view for the Capesize market
in Q3. We expect coal and iron ore imports into China to remain
strong this quarter providing the steel margins continue to be
profitable. Although fundamentals look positive for Q3 the freight
market is increasingly being driven by the overall finance and
commodity environment. We believe that later this year due to
Beijing's decision to curb exports physical steel demand will slow
and the Capesize market will soften.
Chart 2: Indian coal imports will pick up once the monsoon
eases
Chart 3: Weekly average Capesize ballasters to Brazil