Bulk freight rates have shot to the highest levels since the start of 2012 in the last week or so. The Baltic Dry Index has jumped a huge 30% since the end of August and has broken out of the range seen in the last 18 or so months.
Freight rates are still incredibly low, with the oversupply of ships that has continued to hit the market since the massive peak in freight in 2008 continuing to hit the market. Depressed freight rates have slowed the rate of deliveries, the fleet does continue to grow fairly steadily.
The key reason behind freights breakout seems to be much more confidence about the Chinese steel economy, which is central to utilising capesize vessels given it absorbs the vast majority of seaborne iron ore. Production rates remain much stronger than last year and with steel inventories not troubling and iron ore stocks still low, iron ore prices are likely to avoid the collapse we saw last year, which lead to stockpiling by producers.
Not only should demand for iron ore be pretty good, but so too should supply strengthen for key bulk commodities. Iron ore exports from Australia and Brazil should rise on the usual seasonal lift, but also on expanded capacity. This probably won't undermine prices if Chinese steel consumption maintains its recent strength, which seems likely.
Even though thermal coal prices are very depressed, this is not necessarily a bad thing for freight given is largely because supply growth has been so strong. In particular, Australian exports have been incredibly strong.
As I've
written about here, I think prices should improve into Q4 on Chinese restocking. With China providing more competition for tonnes from further afield ports like Richards Bay in South Africa, this should help bolster freight as well.
Met coal exports have been slow, with some of this likely to be semi-soft coals being switched into the thermal market to clear stocks. With Chinese interest picking up on stocking demand, prices have lifted a little.
It would be nicer to see more interest from ex-China, which should start to filter through in Q4 given better leading indicators in Europe and Japan. This should support pricing and perhaps change the incentives between thermal and met coal for those products with borderline coking properties.
