The recent surge in global freight rates for dry bulk vessels has caught the ferrous materials market off guard, making it challenging for the ferrous commodities including iron ore, coking coal, steel, and manganese ore to move globally, Chinese market sources complain. The Baltic Dry Index, the dry bulk market’s key indicator, touched a 1.5-year high of 2,319 points on March 22, jumping 610 points on month.
The surge is being keenly felt by ferrous market participants in and out of China. But this should come as no surprise, as the steel industry accounts for 42% of the dry bulk shipping demand, and the proportion is even higher at 82% in the Capesize market, according to Nick Ristic, analyst from Braemar ACM Shipbroking.
Freight doubles on limited capacity but high demand
So far this year, freight rates for all kinds of dry bulk vessels used for shipping ferrous products have more than doubled from normal levels, mainly because of the limited capacity against high demand while economies worldwide are reviving from the onslaught of the coronavirus, industry sources noted.
Normally, the freight cost of a dry bulk vessel ex-China to Hamad port, Qatar, is $35/tonne but in February, the rate rose to $45/t and now stands at $70/t, according to a steel trader based in Hongkong. “It is horrible,” she commented.
Meanwhile, the freight rate ex-China to Vietnam is normally at $10-12/tonne, but increased to $20/t after Chinese New Year (CNY) holiday in late February and is now in the range of $30-36/t.
Brokers arranging dry bulk vessels with a capacity of around 5,000 tonnes from Japan to China are charging $27-28/t freight, up $10/t in a month, a scrap trader told Mysteel Global.
The effects in capacity shortage ripple the freight market
The culprit is the shortage of shipping capacity across all sizes of vessels, a coal trader based in North China observed, pointing out that many dry bulk vessels have been sent to South America to deliver grain and soybeans, causing short-term availability issues with Supramax and Panamax vessels in Asia. Because of the tightness of such small and medium-sized vessels, some coal buyers have booked larger-sized Capesize vessels for coal loading, he noted.
Meanwhile, an iron ore trader based in East China’s Jiangsu province observed that because part of a bulk vessel’s hold capacity can be set aside for shipping coal as well, so the availability of vessel space has declined further. There is also the need for shipping other materials, such as cement and timber, he noted.
“The freight rates for Panamax and Supermax carriers were the first to rise, then users turned to smaller Handymax carriers, whose freight rates then caught up,” he said. For the time being, the global availability of Capesize carriers is relatively stable, but for Panamax, Supramax and smaller-size carriers, availability is rather limited.
High freight seriously disrupts trading, dampens enthusiasm
Ferrous industry participants are keenly feeling the negative impact of rising freight in their daily business. The surging freight not only eroded their profit margins but also cooled enthusiasm for trading, several industry sources admitted.
“Ship supply is rather tight now, so ship owners are requesting higher freight prices – which both buyers and sellers are unwilling to accept,” a Shanghai-based steel scrap trader remarked. “The current situation is a stalemate – as no party wants to take a step back – and is already affecting deliveries of cargoes in April and May.”
Market participants are generally holding a wait-and-see stance. “Who knows when the freight will go down,” the Shanghai trader said.
Exporters of materials to China, such as the Japanese traders and mills, are already suffering some impact to their business. “Recently, ferrous and non-ferrous scrap exporters to China do not want to make export offers, as they are not sure if they can arrange vessels in time,” a Tokyo-based steel scrap trader explained.
“The delay in vessel arrivals at Japanese ports for the loading of scrap has become a serious issue, and the rapid rise in scrap stocks at Japanese ports such as those on Tokyo Bay is a major reason for the recent decline of scrap prices in Japan,” he said. “Steelmakers can lower their scrap buying prices because they know the dealers and traders have little choice but to find local buyers.”
Japan scrap traders had hoped to add higher freight charges on to their offer prices, but if they add the full amount, the prices will become so high they’ll lose competitiveness. Reluctantly, the Japanese shippers have to absorb some or all of their higher freight costs themselves, the Tokyo trader complained. “It is no good business (so far as exports are concerned),” he told Mysteel Global.
Exchange rates are another issue for the Japanese. Buyers of Japanese scrap in Vietnam, Taiwan and China contract on a US dollar/tonne CFR basis but traditionally, South Korean buyers contract in terms of Yen/tonne FOB. Consequently, these days the Japanese sellers are preferring to sell to South Korea but with the tightness of vessel availability, even for the short sea distance between the two countries the Japanese still worry about securing vessels in time, according to the Tokyo trader.
Chinese steel exports under threat
The high freight charges and tightness of shipping capacity is a big concern for Chinese steel exporters, especially now when China’s central government is believed to be considering reducing the rebate on steel exports – from 13% to the previous 9% level on average – perhaps as soon as from April 1, as Mysteel Global reported.
“Some (steel) traders want desperately to deliver their goods before April 1 to avoid any possible change in rebate, but the squeeze on vessel capacity is rendering this impossible,” a Shanghai-based steel analyst observed.
Moreover, due to the recent rise in freight rates, some steel traders who had signed CFR deals around the Chinese New Year period over February 11-17 have suffered serious losses, and some have even decided to default on some contracts as a result, as Mysteel Global reported.
The surge in freight charges has also partially cooled the enthusiasm for coal trading, a trader in South China handling thermal coal noted. “Higher freight costs, plus uncertainty regarding China’s coal importing policy, mean the traders are not active in buying foreign coal,” she said. China has effectively banned imports of Australian coking coal and steaming coal since October last year, as reported.
Indeed, the only ferrous commodity seen riding out the recent climb in global freight rates is iron ore, for now.
“We’ve noted the rise in freight, but in general it has had no impact on our purchasing arrangements,” an iron ore procurement official with a Shaanxi-based steel mill in North China commented. “Chinese steelmaking relies heavily on imported iron ore, so we don’t have much choice but to accept higher freight charges when they occur,” he added.
As China’s domestic iron ore resources are rather limited, at least 80% of the iron ore the country consumes has to be imported, mainly from Australia and Brazil, Mysteel Global noted, with those from Australia shipped mainly in Capesize carriers and those from the latter, Capesize and Very Large Ore Carriers in the 400,000 dwt class.
For now, the supply and demand in Capesize carriers is relatively stable, especially compared to smaller-sized carriers, so the rise in their freight has not been as significant as that for smaller-sized carriers, according to a Singapore-based analyst.
A Jiangsu-based iron ore trader had also tracked the climb in freight rates but maintained that, generally speaking, its influence on imported iron ore trading is limited for his firm, pointing out that to offset any rises, he adds the increment to ore prices. “Recently, our sales have slowed slightly, but as long as the (Chinese) mills’ demand for iron ore remains, it will not be a big issue,” he explained.
This article has been published under an article exchange agreement between Mysteel Global and SteelMint.
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