Australia still bulking up and supporting freight

Australia's bulk commodity export strength continued in August, with Q4 shaping up to be particularly large given seasonal factors and solid demand.

For both thermal and met coal, there has been little sign of Australian producers paring back overall supply despite soggy prices.  Growth rates have remained in high double digits in August as shown on the chart left.

As I wrote about here, China's reliance on imported thermal coal to satisfy both higher coal burn and restocking demand usually lifts quite a bit in the final months of the year. This should help lift prices and absorb more tonnes from Australia which tends to push production hard before the wet season kicks in.

Chinese met coal demand should also remain buoyant given steel production rates remain healthy, with coke stocks appearing relatively balanced.  For prices to go meaningfully higher, we need to see a recovery in ex-China, which is not yet apparent (see here).

Australian iron ore exports continue to explode, with August eclipsing the record run rates achieved in December last year (which was aided by destocking).  This suggests that Q4 could be incredibly strong given the usual seasonal strength.

On top of this, we have also seen a pick up in Brazilian exports in August, which were up a healthy 13%YoY, with year to date shipments now up 2%.

Looking at iron ore shipments from these two countries relative to last year, shows a huge YoY lift beyond levels seen at the usual high point in December.

This goes along way to explain why freight has been so strong in the last month or so, with the Baltic Dry Index doubling.  Although put in the context of the last couple of years, overall bulk freight shipping costs are pretty low.

This rally can probably be sustained for a while longer, because Chinese demand for iron ore is pretty strong.  Steel production rates in September remain much stronger than expected, with iron ore prices remaining at healthy levels.

But we shouldn't get carried away on the longer term prospects for freight.  Most of the gains in the index have been driven by the rise in the cost in capesize vessels, because in the very short-term, supply is inelastic.  But when ships are in oversupply, which is the case at the moment, this squeeze can be dealt with relatively quickly.

For example, buyers may look to split cargoes into smaller panamax ships, which at the moment would save costs.  More importantly, owners of capesize vessels now have the incentive to speed up ships after slow steaming for the last few years to maximise profits in light of bunker costs.  This dynamic could add 10%+ more capacity on a single route in very short time.

So this rally isn't taking us back to the glory days of the mid-2000s and really has very little to do with the general macroeconomic situation.  Perhaps when prices fall back it will be back above levels seen in the last few years, but the bulk shipping market is still oversupplied.