Shipping an ore bellwether
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.
Frequently Asked Questions about this Article…
Shipping demand for capesize vessels has surged because Australian iron ore exports from the Pilbara are increasing as major miners ramp up shipments. Capesize ships carry bulk commodities like iron ore and their higher demand signals stronger seaborne trade flows between Australia and Asia, which can support freight rates and reflect rising export volumes.
Capesize vessels are very large bulk carriers too big for the Suez and Panama canals, so they must sail around the Cape of Good Hope or Cape Horn. They’re central to moving large tonnages of iron ore, coal and grain; changes in capesize demand are a useful indicator of global bulk commodity trade activity.
Producers in the Pilbara — notably Fortescue Metals, Rio Tinto and BHP Billiton — are ramping up exports. That influx of new spot iron ore tonnes into international markets is boosting demand for capesize vessels and helping to underpin freight rates, according to commodities analysts cited in the article.
The benchmark iron ore price has eased about 5% over the past three weeks to around US$135 per tonne (down from US$142 three weeks earlier). Analysts at banks including CIMB, Barclays and UBS expect further weakness over the next couple of months as Chinese steel mills seasonally ease production — a trend investors often watch closely.
Yes. UBS commodities analyst Tom Price noted the combination of rising export tonnages and a recent slide in prices points to signs that a surplus could be forming in the seaborne iron ore market.
Investor sentiment toward Australia’s iron ore exporters has remained positive: shares in Fortescue, Rio and Atlas Iron have risen steadily over the past two weeks. Fortescue shares were cited at $4.80 — their highest since February 22 and well above the $2.99 level tested at the nadir of last year’s price crash.
Chinese steel mills influence seasonal demand for iron ore. Analysts expect steel mills to reduce production as part of their normal seasonal easing, which typically lowers demand for iron ore and can put downward pressure on prices in the coming months.
Investors should monitor capesize freight-rate indices (which reflect shipping demand), iron ore benchmark prices (noted above), export volumes from Pilbara producers like Fortescue, Rio Tinto and BHP, and seasonal production trends at Chinese steel mills. Together these indicators help show whether supply and demand are tightening or moving toward a surplus.
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