Dry Bulk Market: Are Further Disruptions On the Horizon?
Disruptions in the supply of iron ore from Vale and Rio Tinto’s unwillingness to offset part of the losses occurred, have led to a major correction in the dry bulk market since the start of 2019. Unfortunately for dry bulk ship owners, this trend may well continue, after Vale’s latest warnings. In its latest weekly report, shipbroker Allied said that “with dry bulk shipping still facing sever backlash from the still ongoing and frivolous trade negotiations between the US and China, as well as the dampened prospects on one of its key commodities, namely iron ore, after the Vale accident back in January, forward prospects continued to deteriorate further as more disappointing news came to market on both these fronts during the past two weeks. The case of iron ore exports from Brazil came back into focus on Friday as Vale warned of high-risk possibilities of yet another tailing dam failure at one of its mines”.
According to Mr. George Lazaridis, Head of Research & Valuations with Allied Shipbroking, “this latest warning issued by the world’s largest iron ore producer may well have been proactive, with the local population having already been evacuated, yet it goes to highlight that the issues being faced by Vale have yet to be resolved and we may well see a considerable prolonging to the shut down of 93m metric tons of its iron production. Furthermore, its earlier estimates that its sales could drop to a minimum of 307m metric tons for 2019 (down from 309m metric tons sold last year) may well prove to be overly optimistic in the end. We have already seen a 11% year-on-year drop in production volumes in the first quarter, while it looks unlikely that the company will be able to meet its targets for the second quarter, let alone catch up on the shortage it witnessed in the first three months of the year”.
Lazaridis added that “at the same time, given that Rio Tinto (the world’s no. 2 producer) has not made any excessive efforts yet to cover the gap left behind by Vale and Chinese steel production now running at record levels and feeding strong demand levels during the supply crunch, prices for iron ore have gained now more than 30% since the start of the year. This however has all moved against dry bulk shipping markets and more importantly that of the Capesize market, as the shrinking in ton-mile demand has had a sharp negative impact on the freight rates, with the average earnings for Capesize vessels trading on average at 36% lower compared to the same time frame back in 2018”.
“At the same time, given the most recent step back in the ongoing trade dispute between the US and China and the increased tariffs imposed by Beijing on crops imported from the US, we would hope for an increase of grain activity to have started now given that we are within the peak exporting period for grains from South America. This increase would go to counter the shift away from US producers by China, shifting their interest towards imports from other main producers such as Brazil and Argentina. However, even here it seems as though things have been below initial expectations, with the large-scale pig culling (12% of its swine herd this year) that took place in order to combat the African swine flu epidemic in China, having already softened demand for star agricultural commodities such as soybeans”, Allied’s analyst said.
“What’s more is, if we enter the third quarter of the year with little sight of a trade agreement being reached between the US and China, we will likely see a further softening in the freight market, given that the final four months of the year are historically the seasonal peak months for US soybean exports. As it seems the troubles being faced by the dry bulk market are not over just yet and although some improvement has been noted since the start of April, there are increased risks that the summer period will continue to be volatile and trading on average at levels below what was witnessed back in 2018. Let’s hope something gives and that we are able to see a sharp change away from the current prevailing trends”, Lazaridis concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide