Shipping an ore bellwether
The long-predicted surge in Australian iron ore exports is starting to create ripples, with demand for the ships that carry the commodity between Australia and Asia skyrocketing in recent days.
With investors closely watching the iron ore price for any signs of seasonal weakness, attention has turned to an index that measures demand for capesize vessels, which has almost tripled since June, and this week reached its highest point in 21 months.
Capesize vessels carry bulk commodities such as iron ore, coal and grain, and are so called because they are too large to navigate the Suez and Panama canals, and therefore must round either the Cape of Good Hope in South Africa, or Cape Horn in South America, to traverse the globe.
The recent spike in demand for the vessels is almost certainly linked to the increase in iron ore production that is coming out of the Pilbara, where Fortescue Metals, Rio Tinto and BHP Billiton are all ramping up exports, and doing so faster than expected in the case of the latter two.
UBS commodities analyst Tom Price said the shipping data was a genuine indicator that trade flows had improved in recent weeks.
"There are new iron ore tonnes coming into the market, you've got Rio and Fortescue delivering their new tonnes into the market and they are spot tonnes," he said.
"When you have an influx of new spot tonnes coming into the market, that tends to support these freight rates."
When combined with the 5 per cent slide in iron ore prices over the past three weeks, Mr Price said there were indications that "a surplus was forming" in the seaborne iron ore market. The benchmark iron ore price was fetching a seasonally strong $US135 per tonne on Wednesday, down from $US142 three weeks ago.
Analysts at CIMB, Barclays and UBS are all predicting further weakness in the iron ore price over the next couple of months, as Chinese steel mills begin their seasonal easing of production rates.
This time last year iron ore had momentarily crashed to just $US86 per tonne, in a shift that shocked the industry.
But the various indicators do not seem to be weighing on investor sentiment towards Australia's iron ore exporters, with shares in the likes of Fortescue, Rio and Atlas Iron all rising steadily over the past two weeks. At $4.80, Fortescue shares are now at their highest since February 22, and well above the $2.99 the stock tested this time last year at the nadir of the iron ore price crash.
Iron ore bulls argue that the price will not repeat that crash because stockpiles in China are low.