Tag Archives: Qingdao

The Cape Debate

The Financial Times recently had a lengthy article in their ‘analysis page’ titled the ‘Clash of the Cape Crusaders.’ People in shipping may be excused for thinking that an international, mainstream business newspaper was dedicating a whole page discussing at length the ‘Cape market.’ In the case of the FT however, ‘Cape’ referred to ‘Cyclically Adjusted Price Earnings’ ratio; according to the way PE is adjusted for cyclicality, the broader US stock market can be either undervalued or overvalued. Based on the same benchmark.

Shipping’s capesize market has been experiencing a resurrection recently that has got many industry pundits wondering whether the worst is behind us or just that the recent improvement in this market is a just another ‘false positive’ sign.  Thus, shipping’s own cape debate is whether the market is overvalued or undervalued in its own small universe. Not a small question, really.

First the good news: in the first ten days of September, average capesize rates moved from about $15,000 pd to $27,00 pd (up 80%), while the Baltic Capesize Index (BCI) climbed about 1,000 points to 3,243 (up 45%) and transport cost by 31% from West Australia to Qingdao (China) at $12.1 / ton and about 18% higher on the Tubarao (Brazil) – Qingdao (China) route to $ 23.5 / ton.   Given that this time last year capes, on average, were earning less than $5,000 pd, and that it costs about $8,500 pd in daily operating expenses to run such a vessel, the present rate of $27,000 pd is a most welcome development!  In long forgotten days, such rates may have been a cause to pop a champagne bottle.

As great the improvement in rates as it has been, we all sort of have seen this story before where rates improved seasonally / temporarily and then deflated rapidly again.  However, it seems that the increase in rates this time is driven by end demand and higher production of steel bars in China, which translates into higher demand for iron ore (while quite often in the recent past, increase in freight rates was driven by pure stock piling / replenishing inventories).  Bloomberg reported that steel reinforcement-bar futures in Shanghai have climbed to $613 per ton recently, while steel output has increased to 2.12 million tons in late August.  These all despite the fact that iron pricing is up about 25% in the last three months at $138 / ton and iron ore stockpiles stand about 22% lower than the year ago.

Thus, so far, the news is fairly encouraging, which is most welcome in a market that has been brutally battered by the storms of the weakening word trade and other market dynamic considerations.

Now, the bad news: Rio Tinto has announced an earlier than expected iron ore new capacity to 290 million tons (from 230 million tons previously) on an annual basis. This would have been ‘great‘ news, if not that most of this new production and also additional production coming to market by other miners is taking place in West Australia, which is much closer to China than new production in Brazil, which would had absorbed much more tonnage for the transport of same amount of cargo.

And more bad news: while in the last three months about six capes per month were entering the market via deliveries from shipbuilders (vs more than 15 deliveries per month in 2012), still more than twice as many capes delivered this year than got scrapped (about 70 deliveries vs 30 scrapings); year-to-date, about 130 newbuildings (plus 30 more options) were ordered.  Admittedly it’s tough sourcing rumor from fact on these ‘orders’ and still to be seen how many of these newbuilding vessels will eventually ‘hit the water’, but it’s almost incomprehensible that 10% of the world cape fleet has just been contracted anew in 2013 when on average, year-to-date, average cape freight rates ($10,500 pd) remained just above operating expense levels.  The overall cape orderbook stands at about 20% of the world cape fleet (depending on assumptions), while more than 50% of the world cape fleet is newer than five years old.

Looking at the forward curve for some guidance, while the physical freight market for capes improved and the paper market (FFAs) moved along to same levels for Q4 2013, the forward curve for the next three years stands sizably lower at about $18,500 (admittedly much higher than the level of $11,500 for CAL14 in early June but nowhere close to level covering cash expenses).

The recent developments in the cape market, as welcome and encouraging as they have been, still have not changed our bearish assessment in an earlier posting on this site. It will take more than a market rally to make us reconsider. It’s not that demand is not there…

In our opinion, the shipping ‘cape debate’ is bit clearer to award than the CAPE debate on the US stock markets, in our opinion …

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Between an Australian (Iron Ore) Rock and China’s Hard Place

China’s intended policy to ‘rebalance’ their economy with a greater focus on consumption rather than investment logically could have a negative impact on shipping, especially for large vessels that transport raw commodities to China such as capesize vessels. As more money is being spent domestically on consumer products and services, including either domestically procured or imported luxury goods, where there is more ‘value added quality’ than rudimentary processing of raw materials such as for real estate and infrastructure, big dry bulk vessels may be set for a tough few next years.  A recent article in the New York Times on the ‘credit crunch’ and curtailing some of the ‘shadow banking’ may be an early precursor of what is to be expected.

The price of iron ore, the commodity with the highest seaborne trading volume after crude oil, over the last decade has increased threefold, primarily due to China’s insatiable demand due to urbanization and infrastructure-building spree. Iron ore with 62% ferrous content delivered to Tanjin has been quoted presently at about $130 per ton, a 20% improvement since May alone, when China embarked on a buying spree of the commodity in order to primarily replenish inventories.

Mining companies have been planning a $250 billion investment in order to expand capacity; most of the investment is planned by the industry’s major (and most bankable / competent) players, like Rio Tinto Group (RIO), Vale SA and BHP Billiton Ltd. (BHP), which implies a high degree of diligent execution and delivering of the projects on time. Given the lackluster world economic growth and China’s decelerating economy, most analysts expect a glut in the iron ore supply with prices set for a decline to levels around $100 per ton, on average, over the several years; some analysts even expect that temporarily iron ore may dip well below the $100 / ton mark, meaning rather bearish prospects for the commodity. As a general rule of thumb, bear commodity markets imply bear shipping markets, correspondingly, since there is a very high degree of correlation.

Just to re-ascertain the point of a bear iron ore market may not be good for the capesize vessels, most of the investments and the planned investments for increasing iron ore capacity are taking place in West Australia. In a recent report produced by Goldman Sachs, seaborne supply of iron ore is expected to grow from an estimate of about 1,150 mtpa in 2013 to approximately 1,500 mtpa in 2017, for an overall 30% increase. However, during the same interval, seaborne iron ore supply from Australia is expected to by 44% while from Brazil by ‘only’ 30%. Nothing shabby with these growth rates – as long as you are not a mining company, but, really not a cause to pop a champagne bottle for a shipowner.

Chinese Iron Ore Imports & The BCI

As anyone can quickly ascertain by taking a look at a world map, Australia is much closer to China than Brazil, and it takes three times more ships to transport the commodity from Brazil than from Australia to China. On August 16th, the Baltic Exchange in its daily report was posting the ‘C3 route’ Tubarao-Qingdao at $20.73/ton while the ‘C5 route’ W Australia-Qingdao at $9.01/ton.

The Balics

While over the next five years seaborne iron ore supply is expected to grow by 30%, the supply of capesize vessels (about 180,000 dwt) and Very Large Ore Carriers (VLOCs) (>200,000dwt) is expected to grow by 13% in the next three years, based on firmed, confirmed orders by bankable players (and thus high certainty of actual delivery of the vessels). This again is the firm, known supply, and with the shipbuilders with plenty of spare capacity and desperate need of new orders, it could easily be revised upwards. Not to mention that if iron ore gets cheaper, so it will be the case with newbuilding vessels, which could lead to another round of increased newbuilding frenzy. And, this, at a time when capesize vessels have been averaging $9,000 pd in the freight market, barely sufficient to cover their daily operating expenses (the less said the better on their financial cost, since some such vessels were bought for more than $100 million, and an ‘average’ term amortizing mortgage would presume more than $25,000 pd payment).

It has been said that you never appreciate a friend or ally until you are really in need. China in the last decade has been the cause of ‘irrational exuberance’ in shipping and its excesses thereof, and many other industries of course, such as the mining industry and their ‘commodities super-cycle’. Now that China seems to be slowing down, still to levels that many developed countries only would dream of, the ‘decoupling’ for many industries seems to be messier than expected. But again, China is full of surprises and broken projections …

© Basil M. Karatzas 2013 All Rights Reserved

No part of this blog may be reproduced, in whole or in part, under any circumstances, without the prior written consent of the copyright holder. Please contact: info@bmkaratzas.com