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Higher iron ore prices positively affects shipping rates

Xun Yao Chen, Industrials Analyst

Implication of movements in commodity prices

Commodity prices generally move together with shipping rates. When prices for materials such as iron ore, coal, oil and copper rise, it is often because demand is growing more than supply. This translates to higher import volumes and shipping rates. Thus, when commodity prices are rising, it is often positive for shipping companies’ revenues. On the contrary, when prices fall, it often spells negative for dry bulk shippers.

(Read more: Dry bulk capacity growth slows further, encouraging sign for later half of 2013)

Rising imported iron ore prices

Imported iron ore prices at main ports in China stood at $139 per metric tonne as of August 12th. As the world’s largest importer of key raw materials, China’s industrial activity has an important implication for iron ore demand. Thus, when activity in China picks up, so does demand for iron ore.

Iron ore prices have been rising on the back of the announcement that China will accelerate public projects, such as railway construction, to maintain a stable economic growth throughout the second half of 2013 and to meet its target of 7.5% growth in GDP this year. Higher industrial activity and business sentiment in July, based on the country’s PMI (Purchasing Managers’ Index data), also added to optimism that growth in China is not going to slow down significantly.

Follows a decline at the beginning of the year

Iron ore prices have been falling prior to June, as China reigned in on soaring property prices at the beginning of the year and the new government expressed determination to tolerate lower growth in order to work on reforms. As a result, economic growth fell from 7.7% in the first quarter to 7.5% in the second quarter. The large second quarter decline in iron ore prices was also driven by higher iron ore supply coming out of Australia, which had a positive influence on shipping rates.

(Read more: Supramax price rises first time since mid 2010, signs of shipping recovery)

Higher and lower prices could both be favorable

Australia and Brazil are expected to increase their iron ore capacity this year. Unless weather disrupts supply, we should see higher iron ore prices as a positive reflection of higher demand. On the other hand, lower prices that are driven by increased supply should also be taken as a positive, as it supports shipments.

As long as iron ore prices do not rise out of bound, we should take this as a positive for dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Knightsbridge Tankers Ltd. (VLCCF) and Navios Maritime Partners LP (NMM).

(Read more: Why the Baltic Dry Index has decoupled from the Chinese market)

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