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| Port Hedland in Western Australia, from where most of the world's iron ore shipments originate. |
Freight rates for iron ore are set to cool after hitting a 12-year high in October as planned steel production cuts and a construction slowdown in China dampen the outlook for the steelmaking raw material's prices.
Chinese crude steel production is expected to slow down from the government's efforts to curb steel output to help cut carbon emissions, leading to weaker demand for steelmaking ingredients iron ore and coking coal in the fourth quarter than in the first three quarters of the year, said S&P Global Platts.
Freight rates are expected to follow suit: Platts Analytics expects freight rates for Capesize vessels — the largest class of dry bulk vessels — to drop to $8.35/t by the end of 2022 amid cooling demand for iron ore.
Iron ore and coal make up nearly 80% of dry bulk freight trade, which also includes bauxite, steel products and cement.
Prices, freight rates surge post-pandemic
Post-pandemic recovery in China — the world’s largest importer and consumer of these raw materials for steel — had helped drive iron ore prices to their record high in May, according to Matthew Boyle, S&P Global Platts' head of Global Coal, Asia Power and Dry Bulk Freight Analytics.
Low vessel availability also compounded high dry bulk commodity freight rates, pushing delivered costs even higher.
A shipbroker told Platts that almost all his ships were being delayed, especially in Yangtze River. "Tonnage tightness makes things worse," a shipowner told Platts. "Lots of ships are tied up in China due to quarantine," and work has been delayed due to power shortages in some North China ports.
Platts forecast Capesize iron ore freight rate from Port Hedland in Western Australia to China to average $19.32 per wet tonne in October, its highest in over a decade, beating the previous record of $18.11/t in June 2009.
Capesize ships have capacities of about 170,000 in deadweight tonnage. These vessels almost always carry iron ore, but also coal and bauxite. Australia is the world's largest iron ore producer, exporting it out of Port Hedland mainly to China.
Chinese steel mills now face a situation where they are paying not only high iron ore and coking coal prices but also higher freight costs, further squeezing margins, Boyle said.
"Dry bulk freight rates have been volatile in 2021, with a jump in Capesize rates causing more demand for smaller vessels such as Panamax and Kamsarmax," Boyle said, referring to the vessels that are mainly used for coal and grains trade.
During periods of strong demand for other bulk commodities like bauxite, there will be fewer Capesize vessels available for iron ore and coal transport, driving demand for smaller vessels, Boyle said. Higher demand for smaller vessels will eventually push freight rates for this size class higher until Capesize vessels once again become more economical, even at their elevated freight rates.
This creates positive feedback of rising freight rates, which Boyle likened to an upwards "tornado" where one segment in the market was feeding the other, pushing prices and rates beyond market fundamentals.
China's energy crisis is also a key driver for a tight freight market, with both coal and oil prices soaring, the latter of which leads to high shipping input costs, said Vivek Dhar, Commonwealth Bank of Australia's mining and energy commodities research director.
Of the global dry bulk trade, coal makes up 40%, a fifth of which comprises coking coal and the rest is thermal coal, which Chinese steel mills heavily rely on for power generation.
Domestic supply of thermal coal, constrained by environmental and safety checks, has failed to keep up with power generation, according to an Oct. 20 note from Dhar.
"If this winter proves colder than normal, particularly in North Asia [where many steel mills are located], base metals and coal prices could stay stronger for longer. In our view this winter period is going to be key, and thus freight, base metals and energy prices will likely stay elevated for the next few months," Dhar told Market Intelligence.
Correction in the horizon
Despite expectations of robust prices and freight rates for iron ore and coal in the fourth quarter, curtailments in steel output in China portend a correction on the horizon, analysts say.
"Steelmaker margins in China have increased of late on the collapse in ore prices and cuts in Chinese steel production, which has lifted steel prices there. Outside of China, steel prices remain at historical highs," S&P Global Market Intelligence Principal Analyst for Iron Ore and Steel Ronnie Cecil said.
Iron ore prices have already more than halved since May due to slowing demand, and Cecil said they are likely to remain volatile even into 2022 given the lack of new iron ore projects, along with power shortages, a microchip squeeze, and the property/industrial slowdown in China impacting the demand side, the analyst said.
This is expected to further drive down demand for iron ore and squeeze the commodity price, according to Boyle. The NYMEX 62% iron ore price was $122.50/t on Oct. 22.
"The whole global supply chain is still playing catch up, but is likely to be in a far better position this time next year," Cecil said.