China steelmaking jump sparks rebound in freight rates after slump

PUBLISHED : Wednesday, 16 October, 2013, 12:00am
UPDATED : Wednesday, 16 October, 2013, 3:05am

Freight traders are hiring record numbers of iron-ore carriers in the spot market as mainland steel production expands at the fastest pace in three years, spurring the biggest rally in shipping rates since 2009.

One-time charters to haul the commodity on capesizes, the largest ore carriers, rose 51 per cent to 124 last month from August, according to data compiled by Morgan Stanley. More than 90 per cent are bound for China, and the ore they carry would make enough steel to build about 150 Golden Gate Bridges. The surge means more demand for Nippon Yusen KK and Mitsui OSK Lines, which are based in Tokyo and control the biggest fleets.

The jump in chartering reflects average monthly mainland steel output that has been about 10 per cent higher this year, reducing ore stockpiles to the lowest for this time of year since 2007.

Mainland imports of the raw material hit a record high last month, trimming the fleet's biggest capacity glut in three decades and spurring an almost sevenfold surge in rates since January 2 that has seen shipowners make money for the first time in almost two years.

"Rates have moved quicker than even the most optimistic forecasters had hoped for only a few months back," said Eirik Haavaldsen, an analyst at Oslo-based Pareto Securities. "We have really seen a restocking commencing."

Daily rates for capesizes, each hauling about 160,000 tonnes, jumped to a 34-month high of US$42,211 on September 25, according to the Baltic Exchange, which publishes shipping costs for more than 50 marine routes. They were at US$31,545 on Monday. Freight swaps, traded by brokers and used to bet on future rates, anticipate a fourth-quarter average of US$28,500, the most since 2011. The 300-metre carriers need about US$14,500 to break even, according to RS Platou Markets, an investment bank in Oslo.

The Tokyo-listed shares of Nippon Yusen, with 68 capesizes in its fleet, have risen 62 per cent this year. Those of Mitsui OSK, which owns 64 of the ships, have gained 74 per cent.

The mainland may be producing more steel than it needs, according to Morgan Stanley analyst Fotis Giannakoulis in New York. The surge in charters comes as growth in the mainland's US$8.36 trillion economy slows. China buys about two-thirds of all seaborne iron ore, the second-biggest commodity cargo after crude oil, and its steel mills now account for 50 per cent of global output.

Owners also are contending with a fleet whose capacity more than doubled since June 2008, when capesize rates rose to a record US$233,988 a day and triggered an unprecedented number of orders for new vessels, according to data from London-based shipbroker Clarkson. Trade in iron ore climbed 40 per cent over the same period, it said.

The rally in rates is curbing the biggest ship-demolition programme in at least three decades. Owners who previously intended to scrap vessels were now trading them again, Global Marketing Systems, the biggest buyer of obsolete carriers, said this month.