Feeding off the surge of Chinese steel output

Feeding off the surge of Chinese steel output

The sudden surge in iron ore trade has crept up on the market this past week bringing about a change in the prospects for Capes. Continued increases in China’s daily steel output, feeding the excessive production in steel products, along with the recent restocking by Chinese steel mills that has started to take shape over the past couple of weeks has allowed for a positive trend to develop on the demand side. Prices for iron ore have been reflective of this with the upward trajectory noted during 2016 having been boosted significantly over the past couple of weeks, as prices brake above the US$ 60 a tonne mark. The last time this trend in price had been noted was back in April with the price of iron ore peaking at US$ 70.5 a tonne and the Baltic Capesize index reaching a high of 1,160 both on the 27th of April.
At the same time, and given the recent trends in the supply side of the capesize size segment, the balance in the market is in better shape then what it was in the first quarter of the year. In 2016, up until the end of July, the capesize fleet has decreased by 5 vessels which is equivalent to 0.33% change in the trading fleet. This is by no means anything major as a figure, especially given the fact that the market has been battling an oversupply of tonnage issue for more than two years now. What’s more is that the orderbook still sits at around 12.5% of the current trading fleet. As such, the fear is that although a temporary halt in fleet growth has been reached, with only 94 vessels in the trading fleet which are over 20 years of age and an equal amount of newbuildings still scheduled for delivery within this year with a further 53 and 43 scheduled for delivery within 2017 and 2018 respectively, it seems as though it will be very hard to keep the supply side trends as they are now. As such keen eyes are set to some sort of balance being brought about by any improvements in demand.
There has been little positive signs to note from the coal trade this year, with India being the main country noting positive import growth in 2015 and 2016, while it is also looking to develop and rely more so in its internal production rather than from imports from any of the major coal producing countries. As such the burden that falls on the iron ore trade is not only to fuel its own growth but to do it by such a margin that could help cover the excess demand slack being generated from the weaker coal trade. As such this is the major issue to be battled on the demand side. China, which is the world’s largest importer of iron ore and the largest consumer of steel products, has not been in the best state in terms of economic growth to be able to fuel the same percentage growth in the trade as it had done in the past. The recent re-emergence of its real estate property boom has played a positive role, however as its central government’s focus has shifted more so in propping the service side of its economy, fear is that we will struggle to see double digit growth figures in the future for industrial commodities such as iron ore. For the moment China’s mammoth size and still improving economy (albeit at a slower pace) still generates a fair amount of demand. To what extent and how this will be able to generate a new freight rate boom in the Capesize sector is hard to see.

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