Iron ore prices rose due to improved sentiment, positive for dry bulk shippers

Market Realist

Commodity prices and shipping

Commodity prices are leading indicators of an economic cycle. Because suppliers of raw materials require time to ramp up production, an increase in demand during an economic expansion will often lead to higher prices. As a result, commodity prices correlate highly with shipping.

Iron ore prices

On July 19, the price of imported iron ore at major Chinese ports rose higher from a week ago, from $128.50 to $132.50 per metric tonne. Westpac’s economist Justin Smirk notes that the surge we’ve seen came from a much weaker than usual increase in Chinese iron ore production, rather than an increase in demand. In April and May, lower iron ore prices have encouraged importers to ship more iron ore, which led to an increase in iron ore inventory. In June, when iron ore prices were at their lowest and begun to rise, China’s iron ore imports actually fell, while shipping rates rose. Perhaps the increase in iron ore prices we’ve seen was more driven by optimism, while shipping rates rose due to lower supply growth.

(Read more: Diana Shipping: the most undervalued dry bulk shipping company)

Iron ore prices bottomed in mid 2012 as the central bank of China announced $157 billion worth of stimulus to energize its falling economy. Although iron ore prices rose following the announcement, investors knew more economic stimulus was coming. They learned this from following the news that China’s local governments were actively announcing programs to support their region’s falling business activity over the summer. While the central bank’s announcement drove iron ore prices higher, as well as stocks, prices have come down since, as the government moved to cool the property market that had been growing at ~20% year-over-year, measured in price per square foot.

(Read more: Shipping recovery continues with additional purchases, long-term opportunity)

Inference

The fact that iron ore continues to trade above $100 per metric tonne suggests traders continue to expect that China will be able to prevent a financial crisis, and that the country’s real estate sector should continue to expand over the long term. This has been positive, and would be a long-term positive for shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Partners LP (NMM), and Eagle Bulk Shipping Inc. (EGLE). However, the recent rise in iron ore prices may pressure iron ore imports in the near term.

(Read more: Dry bulk shipping rates rise due to restocking, but likely downside looming)

To see other key drivers that affect the marine shipping industry, visit our driver page, Marine ShippingFor other industries currently available, see our Home Page.

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