The capesize spot market has surged over the past few weeks with the Baltic Dry Index (BDI) closing at 1555 last Friday, the highest levels seen since December 2019. This momentum has been driven by the capesize segment, thanks to increased demand for iron ore from China that has spurred a solid flow of cargoes from Australia and Brazil. Last Thursday saw the largest single day percentage rise, with cape rates jumping 50% overnight.
The period market has also experienced a boost, with capesize rates one-year rates across both basins up 31% from the previous week and this has supported owner’s sentiment for firm rates in the short term. Hopes of a summer resurgence have been raised by new stimulus measures from Beijing put in place in order to restart the economy following the pandemic, causing steel production to be ramped up and increasing demand for iron ore. Despite much of the spending being earmarked for infrastructure, it is unlikely to be as high as the investment levels seen post 2008 financial crisis. Nonetheless, the improving market conditions in China have provided a boost to dry bulk sentiment, the latest figures from Beijing show industrial output for May up by 4% year on year.
Due to weak demand, iron ore cargoes from Canada, the world’s fourth largest iron ore exporter, destined for Europe are now being diverted to China. Consequently, the increase in tone mile demand in the Atlantic basin is one additonal reasons for the boost in freight rates. The latest report from Eurofer estimates that steel demand in Europe is down by 50% since the start of the pandemic in March whereas countries such as China, India, Indonesia and Russia are already restoring steel production and stockpiles.
Brazilian iron ore exports have been supporting Chinese demand with a steady flow of production and exports, although there is some concern around supply due to the ongoing pandemic. Operations in the Carajas region, responsible for over 7% of the world’s iron ore production have been disrupted due to the area being a major coronavirus hotspot and the closure temporary closure of three Vale operated mines at Itabira also has taken 10% of iron ore output offline. Last week Vale announced that the mines may soon reopen, improving sentiment.
Australia is taking advantage of the current disruption to Brazilian ports and mines due to Covid and as the final month of the Australian financial calendar, June is proving to be a strong month in terms of iron ore throughput for Port Hedland in particular. According to a report from management consultancy McKinsey & Co, production disruption in countries such as Brazil and South Africa to Covid, could result in a 5% fall in global iron ore production creating a window of opportunity for Australian miners to meet this shortfall in demand with increased exports to China.
It is evident that recent stimulus measures from China have boosted momentum from for dry bulk and once again and improving sentiment in China is key if we are to see an overall sustained recovery in dry bulk, particularly as the Covid-19 pandemic still continues to impact the rest of the world both in terms of demand and supply with the recent news of Vale mine closures. However, despite news of a second- wave of the pandemic and a resurgence of the virus in Beijing, capsize markets for the moment remain undeterred.