Ground Breakers: Are sliding dry bulk shipping rates about supply chains, or iron ore demand?
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Never mind the impact of the Omicron coronavirus variant, which sent shudders through markets today.
ASX-listed miners have so far proved resilient in the face of Covid-19 and this morning was no exception.
The materials index rose by 0.6%, driven by the big iron ore miners despite a more than US$5/t drop in iron ore prices on Friday.
Fortescue Metals Group (ASX:FMG) recorded a more than 2% gain.
That may have been partly due to an AFR report that Andrew Forrest’s FMG was planning to use the GLX Digital platform to trade some of its iron ore on the spot market, the same company that set up Pilbara Minerals’ (ASX:PLS) Battery Material Exchange which it has used to blast lithium concentrate sales records out of the water.
Meanwhile BHP (ASX:BHP) was also up almost 1.5% in morning trade.
While iron ore prices fell to around US$96/t to end last week on the back of weak steel production data and the proposed continuation of restrictions on polluters in Tangshan, futures have been resilient this morning.
One positive for bulk miners has been a contraction in dry bulk shipping rates that hit multi-year highs in mid-October.
That situation played a role in the closures of a number of smaller, higher cost iron ore operations in WA and Tasmania, and crimped margins for the bigger producers with shipping and transport consuming a widening portion of their cash margins.
While the issue has abated in recent weeks, whether that is a sign of supply chains beginning their long return to normal or just weakness in China’s demand for commodities is up in the air.
“After tripling since the start of the year, the BDI has now fallen by just over 50% since its early-October peak. However, the decline in the BDI has not been mirrored in other shipping cost indices. Container shipping costs have dipped recently, but they remain historically very high,” Capital Economics chief commodities strategist Caroline Bain said in a report last week.
“Instead, we think the drop in the BDI is related to the recent plunge in the price of iron ore which is, in turn, a reflection of the sharp drop in China’s steel production,” Bain said.
“Iron ore typically accounts for around 20-30% of the dry bulk trade and China consumes around 2/3 of the world’s seaborne iron ore.”
“For now, China’s iron ore imports have held up relatively well given the downturn in steel production, but stocks at ports are rising and we think it is just a matter of time before imports plunge. Regardless, Chart 4 suggests that the BDI has further to fall even at current import levels.”
“So, if the BDI continues to slump, it should not be seen as a sign that global logistics are improving or that supply chain bottlenecks are easing, it will merely reflect weakness in China’s commodity demand.”
It remains to be seen what China’s steel outlook will be in 2022, after it instituted a series of measures to restrict production through the second half of 2021. Many analysts believe the restrictions could unwind after the Beijing Winter Olympics in February.