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Like life, commerce goes on,
even in recession. People make things, move
things, and sell things just in slightly smaller
quantities.
Even during the 1929-1933 Great Contraction, the
most traumatic downturn of modern times, when
industrial output halved in the United States,
that still left factories producing 50% of their
previous output, shipping it and selling it.
In the current far milder downturn, output and
trade are already starting to adjust to the
harsher environment. The firming of freight
rates last week suggests the continuing
operation of the physical economy is starting to
put a fundamental floor under some commodity
markets.
Since Dec 5, freight rates have witnessed the
most sustained bounce since August, led by
strong increases for the largest capesize coal
and ironore carriers on routes from Australia to
China. Gains in the overall Baltic Dry Freight
Index totalling 15% (101 points) have been
barely perceptible blip after losses of 94%
(11,108 points) in the previous six months.
But the lacklustre performance conceals sharp
differences in the index components. While rates
on the smallest and most flexible supramax
vessels, and larger multi-purpose grainandore
carrying panamaxes, have continued to soften,
rates on the largest and most specialized
capesize carriers used to transport coal and
iron ore jumped 52% last week.
The usual caveats apply. The dry freight index
and its components measure the price for spot
charters accounting for only a tiny fraction of
the market. They can be distorted by just a
handful of distressed vessels searching for a
charter, or charterers caught short and hunting
for a ship.
Freight rates had sunk to uneconomically low
levels that could not cover owners’ operating
costs so some recovery was inevitable. Rates of
just US$3.90 per tonne on the C5 iron ore route
from Western Australia to China, or US$6.80 on
the C3 route from Brazil, were never likely to
be sustained for long.
But last week’s bounce was really the first,
largest and certainly most sustained rise since
the onset of the downturn in Aug-Sept. The
market is being led higher by continued demand
for Australian coal. The sudden strengthening of
rates on the Australian routes has coincided
with an upturn in port congestion at massive
Newcastle loading terminal.
The number of vessels queued outside the port
has almost doubled from 24 to 45 in the last six
weeks, and the tonnage of coal loading or
waiting to load is up from 2.26 million tonnes
to 4.30 million tonnes. The average time vessels
spend queued up waiting to enter the port is up
from 7.8 days to 14.0. Both queues and waiting
time are at the highest level for a year
Heavy storms have disrupted coal throughput down
the Hunter Valley rail lines and onto vessels in
the last month. But weather has not been
especially bad for the time of year and the port
operators cite the continued strength of demand
rather than poor conditions for the worsening
delays.
The queues at Newcastle have taken some of the
surplus capacity out of the bulk shipping
market, helping stabilise rates and begin moving
them up as short charterers start to cover
near-term shipping requirements. So far the
impact has been confined to the specialist cape
market and Australian routes. Brazilian routes
and the wider market for mid-size and more
fungible panamaxes look more oversupplied with
tramp shipping capacity, and markets are
struggling to bounce.
While China’s demand for coal remains voracious,
and is providing some underlying support after
recent falls, demand for iron ore has fallen
more steeply, and China’s buyers are now
exercising their newfound power to source coal
and iron more cheaply from Australia rather than
Brazil. As a result, rates have risen much
faster on route C5 from Australia to China (up
40% in 10 days) than on the competing route C3
route from Brazil (where rates are up only 30%).
In fact, the ratio of C3 to C5 rates has halved
from 3.20 to 1.60 in a couple of months, the
lowest level for more than eight years.
The ratio is normally very stable around
2.002.50 (reflecting the longer voyaging times
from Brazil).
In the short term, rates vary depending on
shipping delays at Brazil’s main loading
terminals of Tubarao and Ponta da Madeira,
Australia’s massive Newcastle coal terminal, and
the iron ore terminals at Port Hedland and
Dampier in Western Australia. But the freight
ratio is strongly mean-reverting: if rates move
too far away from this level, capacity is
switched from one route to the other until the
market converges.
Strength on the Australian routes is already
starting to spill across as vessels are
reallocated. Rates on the Brazilian’s started to
follow Australia’s upward towards the end of
last week.
The shipping market has arguably been the
fastest to adjust to the downturn. After selling
off harder than any other, it may have been the
first to find a floor based on underlying
structural demand. — Reuters |
