OREANDA-NEWS. May 18, 2015. During Singapore Iron Ore Forum 2015, we hosted a panel of dry bulk freight industry experts to discuss recent market dynamics. The panel included speakers from Noble Chartering, Swiss Marine, Cargill, Castleton Commodities International, Tata NYK Shipping and Singapore Exchange (SGX).  Key themes discussed included: the evaporation of forward demand for FFAs; lower congestion at ports; new trade routes induced by low freight rates; the trend towards larger vessels; higher demolitions; and the general freight rate outlook.

Evaporation of forward demand; it’s paid to play spot
Approximately 70% of capesize cargoes are iron ore, while the rest are largely coal. With the substantial declines in both iron ore and coal prices through the course of 2014, and with both markets in oversupply, there has been little incentive for buyers to purchase forward. Meanwhile, with capesize freight rates falling through the end of 2014, fixing prices forward generally lost its appeal to charterers. Coupled with lower oil prices, it has generally paid to play spot in recent months. Large iron ore shippers that would normally fix two to three months in advance are said to instead be waiting until the very last minute to fix a spot vessel.

Lower congestion
2014 saw strong capesize demand growth, with an estimated additional 170 million tonnes shipped in 2014 versus 2013. However, cape rates plummeted in Q4 2014 (falling c.75% during the quarter).  While a significant amount of this additional demand was short-haul trips (Australia – China), increasing the carrying capacity of the fleet, congestion was another factor contributing to the weakness in late 2014. According to Swiss Marine, there were on average 30 less capes waiting in Chinese ports during December, despite a greater number of capes arriving overall.

Low freight rates opening up new trade routes
One of the effects of multi-decade low freight rates is that it is opening up different routes that were not previously economical, thus leading to changing trade flows.  It is well known that seaborne iron ore has been displacing domestic Chinese output.  However, low freight rates are also impacting trade flows elsewhere. Indian imports of both iron ore and coal have been rising, and Brazil has been exporting more iron ore to other countries such as Croatia and Mexico. Lower freight rates also provide a boost to producers’ margins and may induce more seaborne tonnage that would not typically occur in a high freight rate environment, as a result adding more tonne-miles to the dry bulk freight market.

Upsizing – the trend towards larger ships
Average vessel size is increasing. One of the clear benefits of this is the economies of scale it provides, helping achieve the lowest-cost freight rate per tonne. This trend is expected to continue over the medium-term, and the most obvious beneficiaries are the long-haul routes. Infrastructure and the ability to absorb larger tonnage is an important potential constraint. India is notably developing new capesize ports; many Chinese ports can already receive large ships etc. Capesize vessels are also displacing smaller vessels as low-cost iron ore supply from the major producers displaces supply from non-traditional regions.

High demolitions – an encouraging sign
We have seen an exceptional rate of scrapping so far in 2015, with 60-70 capesize vessels scrapped to date. This compares to just 25 capesize vessels scrapped during the whole of 2014. When taking into account supply additions during the period, net fleet growth in the capesize market has been slightly negative.  In light of potential cargo growth and slowing fleet growth, some panellists suggested that if the current demolitions run-rate continues, the market may be underestimating the potential for a rebound in capesize freight rates later on this year.

Outlook – a bumpy road ahead
The supply response to date this year has been significant. If this continues (i.e. low prices essentially being the cure for low prices), it should eliminate excess supply capacity in the market and lead to a gradual rebalancing of supply and demand.  This is expected to take some time yet, and overall rates could remain relatively subdued over the next 12 months according to some panellists. That said, most panellists expect a bumpy ride ahead over the remainder of 2015 (Capesize rate volatility notably spiked in earlier this week).

SGX Freight – momentum building
SGX Freight derivative volumes have continued to garner powerful momentum in recent months.  Jan-Apr 2015 volumes totalled 50,738 contracts, up 426% y/y. Year-to-date, volumes are already more than 55% higher than the total volume cleared in 2014. Global market share has also increased correspondingly. SGX uniquely provides effective risk management tools to manage both the underlying bulk commodity and freight rate exposures together on the same platform.