Macro Economics – Bimco update 13. March

Macro Economics: Growth improving in the advanced economies while the emerging and developing are losing some steam
Global economic activity is once again at the centre of attention as the shipping industry looks for guidance on the overall future demand. The good news is that International Monetary Fund (IMF) projections point towards increased Gross Domestic Product (GDP) growth with the US leading the way forward, while falling commodity prices negatively affect the potential growth for commodity exporters among the emerging and developing economies.

From a helicopter point of view, the US has outperformed expectations while Japan has again fallen short of the same. The IMF has also revised in negative direction the prospects of future growth in the euro area, China and Russia.

This affects shipping demand in multiple ways. For instance, lower commodity prices should, in theory, spur demand if the commodity is price elastic (a measurement for responsiveness of demand to price changes).

Will this be the case for iron ore? Perhaps. Will the lower oil price improve the fundamental conditions in the tanker market in itself? Unlikely, as oil is considered to be overall inelastic. Will the slower GDP growth in emerging and developing markets result in a reduced import of containerised goods? It is likely it will.

Dry Bulk Shipping: After all-time low Baltic Dry Index (BDI), stronger volumes in Q2 are likely to support the freight market
How bad can a market be? Extremely bad if you look at the dry bulk shipping market since early December 2014. The fourth quarter of 2014 was hugely disappointing, ending in complete despair, with Capesize rates diving below USD 5,000 per day in mid-December. On 18 February, the BDI hit an all-time low of 509; Supramax freight rates were the only ones above USD 5,000 at USD 5,002 per day.

Demolition of dry bulk tonnage was relatively modest for a long time when considering the fundamental conditions of the freight market. However, recent extremely poor freight markets have stirred it up. At the end of February, 68 ships with a combined capacity of 5 million DWT had been demolished since the turn of year, out of which half were of Capesize capacity with an average age of 21 years.

India was the beam of sunlight in an otherwise dark coal market in 2014. Going forward more support could come from India. In China, the question that has been unanswered for a long time is will the lower and lower international iron ore price (-47% in 2014 and still falling some 15% in 2015) favour imports and eventually lead to large scale shutdown of inefficient low-quality Chinese iron ore mines? The jury is still out on that one.

Facts are as follows: in 2014, the amount of domestically mined iron ore was up by 4.3% while the iron ore quality of the same went down from an estimated Fe-content of 21% in 2013 to 17% in 2014. Meanwhile iron ore imports with a Fe-content of 62% went up by 13.7% in 2014 from a year earlier.

Will it become reality or remain a dream – and to what effect will it matter to the Capesize market? Australian exporters won the battle in 2014, much to the regret of the freight market. BIMCO expects that they will not let go of the lead, at the expense of long-haul shipping demand from Brazil. All mining majors have expansion plans in place for 2015 and 2016, and yet another Aussie, the new Roy Hill iron ore mine, will join them towards the end of 2015. The site is set for 55 million tonnes a year once fully operational.

To sum up, our forecast for March/May: BIMCO assesses that the Capesize time charter (T/C) average rates will be in the range of USD 3,000-9,000 per day.