Steel mills abandon spot market for contracts
RESURGENT iron ore demand from European and Japanese steel mills has underscored falls in the number of capesize bulk carriers hired on the spot market, as industrial giants emerge from the freight market collapse a year ago determined to take greater control of commodity and transportation costs.
Restocking mills have returned to using renegotiated contracts of affreightment and consecutive voyage contracts as they buy iron ore from miners under contract, brokers are reporting.
?A lot of iron ore is being shipped but you have seen a reduction ? not a cancellation ? of spot market fixtures as Europe and Japan have come back in,? said Howe Robinson head of dry cargo research, John D"Ancona today.
?The iron ore market is not slowing down, it is shipping the most quantities of iron ore ever. But it is switched off the spot, on to the contract,? Mr D"Ancona added.
The shift towards contract shipping coincides with this year"s collapse of the 40-year-old annual benchmark pricing system for iron ore, which provides employment for 70% of the world"s fleet of 900 capesize bulk carriers.
With Australian iron ore now diverted to Japan, Mr D"Ancona forecasts short-term tightness in global iron ore supplies.
He said that this looming temporary shortfall, rather than any lull in demand, was behind a forecast fall in monthly
Chinese imports, after hitting records earlier in 2009.
Chinese mills substituted their expensive domestic supplies for cheaper imported iron ore available on the nascent spot market early in 2009, as they began to restock six months before their European counterparts.
This helped to fuel spot capesize rates, which pushed up to $93,000 per day in July.
?Never before has price sensitivity for iron ore had such an impact on the dry cargo market,? Braemar Seascope research manager Peter Malpas told shipowners at a conference last week.
About 1,300 capesize spot fixtures were reported to the Baltic Exchange in 2008, from an estimated 5,400 capesize voyages, according to Braemar analysis.
Greek owners have privately raised concerns to Lloyd"s List about the 93 very large ore carriers that are under construction at Asian shipyards and scheduled to enter the bulk carrier trades. This will also shift volumes from the spot market.
All but one of the estimated 30 very large crude carriers converted to very large ore carriers are now transporting iron ore from Brazil to China under long-term contracts with mills.
?There is a lack of transparency,? one delegate told the conference in Athens last week, where the trend from spot to contract shipping was debated.
?Mills are treating contracts like options; if they can buy iron ore cheaper on the spot market they will, and honour a contract only if it works in their favour.?
Also pushing contracting spot volumes was Brazilian miner Vale, which controls a third of the 845m tonne market in seaborne global iron ore.
The Brazilian miner has chartered just four bulk carriers since mid-July, after taking 44 in the second quarter of 2009, now it has shifted from fob to cif sales.
However, after spending $160m in nine months to acquire a fleet of a dozen secondhand capesize vessels, Vale no longer needs to use the spot market, its brokers said last month.
Source: Michelle Wiese Bockmann - Lloyds List
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Steel mills abandon spot market
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