Why lower iron ore prices could mean higher Capesize rates

Market Realist

Why China is important to the dry bulk shipping industry (Part 7 of 9)

(Continued from Part 6)

The relationship between commodity and shipping rates

Commodity prices generally move together with shipping rates. When prices for materials such as steel, iron ore, coal, oil, and copper rise, they can follow demand that’s rising faster than capacity can increase. This also means higher shipments and shipping rates as well as share prices for dry bulk shipping firms. When prices fall, however, they’re often negative for dry bulk shippers. But there are cases when falling commodity prices are positive for shipping rates.

Rising steel suggests solid demand

On August 30, the domestic spot price for hot-rolled steel in China stood at 3,663 renminbi per mt (metric tonne). Prices have been rising since the end of May at 3,436 renminbi—which was near the lows of 3,400 during the financial crisis. This also occurred in mid-2012, before the government-initiated stimulus programs to energize the economy. Since public steel companies play an important role in keeping citizens employed, that price level could be the support line that the government wants to maintain and something investors may want to keep in mind.

Iron ore prices have come off a recent high

Prices of imported iron ore have risen since June as well on the back of higher industrial activity, following actions by the government to stabilize growth. That has negatively affected August’s import data, however, as the difference between domestic and imported iron ore prices diminished. Nonetheless, prices have come off of their recent high of $140 to $136 per mt on September 11, which appears to be driven by increased supply of iron ore from southern countries such as Australia and Brazil.

At the start of the year, prices for iron ore and coal were higher because of increased industrial activity in China. The wet season in Southern Hemisphere countries such as Brazil and Australia, which typically spans from December to March, also contributed to the higher prices. So while we saw high prices for iron ore, they didn’t exactly help Capesize rates. (Capesize vessels primarily haul iron ore and coal.)

When mining operations resumed in the Southern Hemisphere during the second quarter, iron ore prices fell. Commodity prices were also negatively affected by China’s new government’s tolerance for lower economic growth, on top of actions that were taken to cool the property market from overheating again around February. Shipping rates rose, however, as trade volume increased.

Falling prices to be favorable for shipping stocks

With further new mining capacity expected to come online later this year, as large mining companies ramp up expansion, iron ore prices are expected to fall. If prices continue to fall from here, Capesize rates should rise and shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Navios Maritime Partners LP (NMM), and Navios Maritime Holdings Inc. (NM) should benefit.

Continue to Part 8

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