Bulking up

Bulk freight has bounced back from the recent trough following the usual seasonal fade-out seen in January.  For now, capes are outperforming the struggling panamax index, which is likely affected by the poor bid for coal and the loss of various ores due to the Indonesian export ban.  Iron ore, thermal coal and met coal volumes remain buoyant, despite weaker prices.

A large driver of the capesize index is availability of iron ore from Brazil, which ultimates shifts the balance in ships between the Atlantic at the Pacific.

The start of 2014 has seen the standard seasonal fadeout from the end of 2013, although February shipments were quite a bit better than the same period last year.

Australian iron ore supply has also been strong and has suffered less than it usually does from weather impacts.  There is still potential for some disruption in the coming month or so, including a potential strike from tugboat operators at Port Hedland, but generally supply remains good.

There is an argument that every tonne produced from Australia and Brazil should make its way into the seaborne market even if China is weak and prices are falling, because on a cash cost basis they are so competitive.

This is mostly true, although in short periods of very sharp price declines and overstocking in China, shipments can slow and inventories build at mines and ports. This is what happened in September 2012.

Growth in both thermal and met coal has been surprisingly strong at the start of 2014 given prices are so weak.

Growth in seaborne steam coal is driven almost exclusively by Indonesia, with shipments from elsewhere either flat or a little bit weaker.  This growth should slow given the lead from slower Chinese import data, although there are no signs that low prices are causing total seaborne supply to waiver.

The same is true for met coal, although this may start to show YoY declines in the coming months.

To be sure, some of this met coal tonnage is likely to be making its way into thermal coal markets given how weak prices are for semi-soft type coals.

Cape rates should start to come off given the spread to panamax rates, with the economics potentially shifting splitting cargoes.

But even so, bulk freight is stronger than it was a year ago, suggesting the slowdown in new ships and the growth in bulk commodity supply is starting to tip the balance, even if it is off a very low base.