Dry Bulk Trade: Bad news for China is good news for Iron ore market?

The Capesize (180k dwt) 5 TC average rose by USD4,097 per day week on week on 3 July 2019 at USD 23,214 per day.

• Interestingly, it shows similar trend last year. Basically, there is good recovery of iron ore shipments from Brazil and Australia. The increase in Colombian and US coal and Guinean bauxite fronthaul activities with the shortage of ballasters due to relative strength of C10 over C8 rates for past few months has lifted Atlantic market significantly.
• PMXs and SMXs also continue their positive sentiment thanks to the strong moves of the Capes market.

Iron ore prices are also going up, reaching more than USD120 per ton (62% Fe).

• Recent liquidity injection by Chinese government, positive news from the G-20 meetings in Osaka, and steel production cut to reduce air pollution in China boosted commodity prices sentiments and speculative activities from traders.

Many believe current movement is driven by 'price-driven' speculative flow rather than fundamental demand. However, speculation itself is also part of the market. Historically, additional speculative demand from Chinese traders has been the main reason of the spike in the market.

Outlook

• Positive: With recent poor economic indicators, Chinese government will keep trying to stimulate its economy. Therefore, if we see negative Chinese economic signals in Q3, Chinese stimulus will be likely to continue to achieve above 6.0% annual GDP growth, with infrastructure investment, tax cuts, and liquidity injection, all linked to steel demand.
• Negative: Iron ore prices may eventually decline as (1) all miners will try to increase supply to maximise profit with current high prices, (2) more scrap and domestic ore will be used in China, and (3) most importantly, high iron ore prices will reduce steel production margin, and consequently steel production is likely to decrease.

IHS Markit freight forecast models, released yesterday, predict dry bulk freight rates to strengthen in the second half, while C5TC models increased the view on Q4 2019, showing 'buy' signals, as more aggressive stimulus policy is expected in China with negative economic signals.

The Freight Rate Forecast is a data-driven and unbiased forecast model built in partnership with the Baltic Exchange to predict monthly settlement prices of both voyage and time charter indices, on a monthly basis up to 3 yrs. In total, we cover 30 routes of 3 vessel types - Capesize, Panamax and Supramax.

The core service comprises of monthly reports containing in-depth analysis of future freight rates backed by the results of a cutting-edge predictive model that uses using machine learning and advanced analytics to unravel the complexities of the shipping market with ease.

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Posted 05 July 2019 by Daejin Lee, Lead Shipping Analyst, Associate Director, Maritime & Trade, IHS Markit