August 26, 2021

Shortage of ballasters could prolong high Capesize rates

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Port congestion in China has pushed Capesize rates to a multi-year high

The spike in capesize rates this week has been triggered by port delays in China. Even as congestion appears to have peaked, a shortage of ballasters heading to Brazil could sustain the higher rates, but long term, cooling demand from China, especially for iron ore and metallurgical coal, should see levels drop.

Port congestion in China has tightened supply after a period of sustained high demand for bulkers. Capesize rates hit a decade high of $36/t on the Brazil to China route. The recent record level was reached after rates had pushed steadily higher this year, fueled by a surge in demand for coal and iron ore in China. Global exports of the two products have increased 15% to 244Mt in July since dropping to a four-year low of 211Mt in February.

Last week 6.3% of the Capesize fleet had been waiting to discharge in China for five or more days, the highest level since August last year. Delays are not centred on particular ports, with the number of vessels waiting increasing at a number of locations. The delays have been triggered as China adopts additional measures to contain the spread of the delta variant. 

While port congestion has been the trigger, an important component in the increase in bulker demand supporting rates has been the return to higher output from Brazil . Dry bulk exports from Brazil jumped rapidly in March as economic output began to recover. There is expected to be 25Mt of Brazilian iron ore discharged in China through August, up from 19Mt in July. The large number of vessels fixed to arrive this month, combined with the recent build in port congestion in China has led to a sharp drop in ballast supply to Brazil.

Congestion reduces ballaster supplies to Brazil 

This week there were 75 Capesize ballasters signaling for Brazil within 24 days of arriving in the country. This is down from 118 in the first week of July and the year-to-date average of 83. The current number of ballasters heading to Brazil is higher than the level in late April and early May. At that time rates spiked to just over $31/t. This time, rates have pushed on further as, despite a small decline, they have maintained the gains made steadily this year, leaving the market already quite firm when congestion began to have an impact. In addition, the number of vessels in the 12-to-24-day period from Brazil is the lowest it has been since April, raising the risk of vessel tightness for an increasingly prolonged period. However, typically the drop in the ballaster count does not last for very long, with a spike in rates drawing in more vessels, easing the pressures on rates.

The number of ballasting Capesizes to Australia was also down slightly at the start of the month, but this has been less significant, limiting supply tightness. As a result, there hasn’t been the same magnitude in the rise in rates from West Australia to China. Ongoing geopolitical tensions between the two states have also helped to stifle the flow of thermal and metallurgical coal, shifting Chinese demand to alternative producers, including Indonesia, Canada and the United States.

The vessel supply situation in Brazil could be alleviated by a shift to alternate tonnage. Supply of VLOC ballasters is better than on the Cape side. Over the longer term, the current run of strong import demand from China may be set to cool. The Chinese economy is in a late-cycle expansion with growth already showing signs of plateauing. This is likely to weigh heavily on demand for iron ore and with it there will be a drop in charters, easing the upward pressure on the dry bulk market.

Capesize ballasting vessels heading to Brazil by time of arrival (days)

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