Here's to brave new worlds
The Capesize bulk carrier market is firming up again and only time will tell if this uplift is anything more than a false dawn. The rally in the big ships is being ascribed to the looming 1 April deadline for moving iron ore and met coal under current year prices and so has all the makings of another bubble. After then, all bets are off and given the scuffles surrounding this year"s benchmark negotiations for the annual iron ore contract, shippers caught needing to move products after that date could find economics tilted against them.
The problem is knowing which way the tilt will be, or how big the bubble will grow. Sustained industrial expansion in China could see demand remain firm through the year, provided there is no further fiscal tightening to cool down the economy. If the reverse scenario happens, a signal that 2010-2011 will be a year of restraint could send prices down and hit shipping demand just as it is at its most vulnerable.
The annual danse macabre that is the benchmark negotiations looks set for a bloody finale, as the miners open with demands for a 40-50% price increase and the Japanese and Chinese mills plead steel price poverty.
The process includes not just Japanese but Korean and European mills too, but these have tended to get rather overlooked in the noise that surrounds Chinese ore demand and steel production. Given the numbers involved it"s easy to see why.
It"s a situation which ignores the reality that the benchmark is to a great extent already broken. Most mills and some producers see the absolute sense in abandoning a system which fixes an annual price for a commodity in a market where price swings are the norm and so affected by other commodities.
China"s somewhat split personality on the issue is reflected in the fact that many importers and mills buy and ship ore on the basis of spot purchase, unpriced or floating rate contracts and some benchmark purchases. This knowledge is not enough to move the official position that there is the benchmark and nothing else and it is not hard to sense that someone is saving face. The insistence on a benchmark need not be a financial straightjacket ? if used in combination with the iron ore indices (all priced for cost and freight delivery into China) it could be a useful tool for measuring iron ore price volatility against predicted volume demand. It might also show just how out of touch a single negotiated price looks in a market where all other price factors are so mobile.
On the other corner of the triangle, ship owners are trying to work out whether the strong start to the year can be sustained and at what levels. The signals remain pretty mixed ? last year was certainly no disaster and this year looks volatile but with some additional upside from returning confidence and increased economic activity.
Even with 100 bulk carriers completed so far this year alone, charterers are still welcoming the newcomers with respectable freight rates for spot and time charter contracts. The problem that remains is one of over-indulgence at the top of the market and its effect on recovery.
A preliminary survey of bulk carrier deliveries in the first two months of 2010 by Lorentzen & Stemoco shows 5.4 million DWT was completed by Asian shipyards in January, ranging from very large ore carriers to Handysize bulk carriers. In February, another 5.4 million DWT came out of the shipyards.
For the first quarter of 2010 the brokerage estimates that some 16.6 million DWT of bulk carriers will be delivered and for 2010 as a whole, it assumes that 64.2 million DWT will be delivered, more than 30% up on the previous year.
That is somewhat lower than the scheduled 108.5 million DWT which should be delivered but thanks to difficulties experienced by ship owners and shipyards, many of these will either be cancelled and postponed. In addition, the brokerage predicts 12.1 million DWT of scrapping since over a quarter of the fleet is are over 20 years and 15% is over 25 years.
Overall then, L&S predicts that the bulk carrier fleet will increase by about 12% year-on-year to 490 million DWT in 2010 ? the largest single year expansion in history. Despite this terrifying number, the 2009 market rebound from the aftermath of the financial crisis led by emerging economies have conspired to keep vessel capacity utilisation hovering above 90%. Rather than a collapse in freight rates, earnings have amply covered ship owners" financial and operating costs.
Going forward, there is little doubt that the sharp fleet expansion will require a lot of cargo to keep the ships busy. A simple calculation assumes that 180 Capesize bulk carriers are delivered in the course of 2010. All of them will be carrying iron ore to China, half from Brazil and half from Western Australia.
The Brazilian portion will undertake four and a half voyages each during the year with cargo intake of 165,000 tonnes per voyage, carrying about 65 million tonnes in all. The other 90 vessels, moving between Western Australia and China vessels will make nine voyages during the year with the same cargo intake per voyage, discharging about 135 million tonnes. In total, these ships will need to carry 200 million tonnes of iron ore to be fully employed.
In 2008 China imported about 440 million tonnes of iron ore. In 2009, it increased iron ore imports by more than 40% to about 628 million tonnes. Most analysts, including Lorentzen & Stemoco, estimate that China will import up to 750 million tonnes of iron ore in 2010.
However, even such a big increase is less than the 200 million tonnes of new ore demand necessary to absorb all the new Capesizes coming to the market.
Of comfort to owners is that China"s intake will not be the only source of vessel demand as other Asian and even some European destinations should also be seeking increased shipments of iron ore.
In addition, seaborne coal trade is growing fast, again centred on Asian buyers sourcing cargoes from distant mines in Australia, South Africa and South America, generating unforeseen tonne-mile demand for bulk carriers and creating supply-side bottlenecks which effectively reduces the ships available and helps to keep rates high.
So 2010 looks like being a pivotal year and it could be a positive one. It could be that iron ore miners feel confident enough to refuse to sign off on a benchmark price at all, or at most acknowledge it in public but insist that a portion of sales are tied to the market in some way. It could also be the year that sets the tone for the next few years in the large bulk carrier market: firm if unspectacular rates tied to strict scrapping ? provided that owners are still willing to trade over-exuberance for a dose of prudence.