U.S. Markets open in 3 hrs 59 mins

Australia keeps pumping out iron ore for China, driving global shipment volume

Xun Yao Chen, Industrials Analyst

Australia: The commodity giant

Australia, one of the world’s most natural resource–rich countries, has become one of the largest commodity giants over the past decade, on the back of China’s golden age investment-led economic growth of 10% each year. Accounting for close to 50% of total iron ore shipments to China, as well as a percentage of total iron ore seaborne export, Australia’s iron ore export volume is a key indicator of dry bulk shipping demand. When Australia’s iron ore export volume grows at a rapid pace, it means more business for shipping companies, which bids up shipping rates. On the other hand, if export volume stagnates or falls, it will negatively affect shipping rates.

(Read more: 7 points that reflect tanker fundamentals say recovery isn’t looming (Part 2))

Australian Iron Ore Export to China 2013-07-25

Australia pushes ahead with larger export

Although the market has fallen due to China’s tolerance for lower economic growth since the start of the year and experts widely agree that China’s economic growth will never grow as fast as it did before the financial crisis, Australian iron ore producers haven’t slowed their production and shipments. Instead, they just exported a record amount of 37 million metric tonnes of iron ore to China in May, and the average iron ore import (using the last six months of data) rose from 32.5 million in April to 33.4 million metric tonnes.

(Read more: 7 points that reflect tanker fundamentals say recovery isn’t looming (Part 3))

Capacity addition to support export volumes

Analysts estimate export from Australia to increase further, as they expect China to add approximately 100 million metric tonnes of capacity this year, half of which Rio Tinto will supply. That’s an extra 8 million per month. During the last quarter of 2013, Australia exported an average of ~45 million tonnes of iron ore per month. An increase of 8 million tonnes of iron ore of monthly capacity should add roughly 17% growth to Australian iron ore exports towards the end of this year.

Since Australia’s iron ore export makes up ~13.5% of the world’s total dry bulk shipments, 17% growth will add ~2.3% to global dry bulk shipping trade volume. This will have a positive effect on the overall market’s shipping rates for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Partners LP (NMM), and Safe Bulkers Inc. (SB).

Learn more about indicators that drive the dry bulk industry

To see why companies are adding capacity despite weak iron ore prices, continue to Rio Tinto to increase iron ore capacity, positive impact to dry bulk shippers and Downward-sloping iron ore forward curve suggests higher dry bulk shipments ahead.

(Read more: Falling bulk carrier orderbook marks progression)

More From Market Realist