LIKE life, commerce goes on, even in
recession. People make things, move things, and sell things just in
slightly smaller quantities.
Even during the 1929-1933 Great
Contraction, the most traumatic downturn of modern times, when
industrial output halved in the United States, that still left
factories producing 50% of their previous output, shipping it and
In the current far milder downturn,
output and trade are already starting to adjust to the harsher
environment. The firming of freight rates last week suggests the
continuing operation of the physical economy is starting to put a
fundamental floor under some commodity markets.
Since Dec 5, freight rates have
witnessed the most sustained bounce since August, led by strong
increases for the largest capesize coal and ironore carriers on routes
from Australia to China. Gains in the overall Baltic Dry Freight Index
totalling 15% (101 points) have been barely perceptible blip after
losses of 94% (11,108 points) in the previous six months.
But the lacklustre performance
conceals sharp differences in the index components. While rates on the
smallest and most flexible supramax vessels, and larger multi-purpose
grainandore carrying panamaxes, have continued to soften, rates on the
largest and most specialized capesize carriers used to transport coal
and iron ore jumped 52% last week.
The usual caveats apply. The dry
freight index and its components measure the price for spot charters
accounting for only a tiny fraction of the market. They can be
distorted by just a handful of distressed vessels searching for a
charter, or charterers caught short and hunting for a ship.
Freight rates had sunk to
uneconomically low levels that could not cover owners’ operating costs
so some recovery was inevitable. Rates of just US$3.90 per tonne on
the C5 iron ore route from Western Australia to China, or US$6.80 on
the C3 route from Brazil, were never likely to be sustained for long.
But last week’s bounce was really the
first, largest and certainly most sustained rise since the onset of
the downturn in Aug-Sept. The market is being led higher by continued
demand for Australian coal. The sudden strengthening of rates on the
Australian routes has coincided with an upturn in port congestion at
massive Newcastle loading terminal.
The number of vessels queued outside
the port has almost doubled from 24 to 45 in the last six weeks, and
the tonnage of coal loading or waiting to load is up from 2.26 million
tonnes to 4.30 million tonnes. The average time vessels spend queued
up waiting to enter the port is up from 7.8 days to 14.0. Both queues
and waiting time are at the highest level for a year
Heavy storms have disrupted coal
throughput down the Hunter Valley rail lines and onto vessels in the
last month. But weather has not been especially bad for the time of
year and the port operators cite the continued strength of demand
rather than poor conditions for the worsening delays.
The queues at Newcastle have taken
some of the surplus capacity out of the bulk shipping market, helping
stabilise rates and begin moving them up as short charterers start to
cover near-term shipping requirements. So far the impact has been
confined to the specialist cape market and Australian routes.
Brazilian routes and the wider market for mid-size and more fungible
panamaxes look more oversupplied with tramp shipping capacity, and
markets are struggling to bounce.
While China’s demand for coal remains
voracious, and is providing some underlying support after recent
falls, demand for iron ore has fallen more steeply, and China’s buyers
are now exercising their newfound power to source coal and iron more
cheaply from Australia rather than Brazil. As a result, rates have
risen much faster on route C5 from Australia to China (up 40% in 10
days) than on the competing route C3 route from Brazil (where rates
are up only 30%).
In fact, the ratio of C3 to C5 rates
has halved from 3.20 to 1.60 in a couple of months, the lowest level
for more than eight years.
The ratio is normally very stable
around 2.002.50 (reflecting the longer voyaging times from Brazil).
In the short term, rates vary
depending on shipping delays at Brazil’s main loading terminals of
Tubarao and Ponta da Madeira, Australia’s massive Newcastle coal
terminal, and the iron ore terminals at Port Hedland and Dampier in
Western Australia. But the freight ratio is strongly mean-reverting:
if rates move too far away from this level, capacity is switched from
one route to the other until the market converges.
Strength on the Australian routes is
already starting to spill across as vessels are reallocated. Rates on
the Brazilian’s started to follow Australia’s upward towards the end
of last week.
The shipping market has arguably been
the fastest to adjust to the downturn. After selling off harder than
any other, it may have been the first to find a floor based on
underlying structural demand. — Reuters