Firming steel prices in China will have a beneficial effect on dry bulk freight rates in the near term with capesize ships projected to earn $35,000 a day, Dahlman Rose equity analyst Omar Nokta said.
This would represent a 25% improvement from today’s spot capesize rates of around $28,000, at which levels the market has remained stationary during March and April, Mr Nokta said in a research note.
The projected increase in the capesize freight rate would belie an anticipated increase in domestic iron ore production in China, which in the normal course would be expected to eat into ore imports, and thus into seaborne cargoes and freight rates.
Mr Nokta attributed this paradox to Dahlman Rose’s determination that spot rates have been influenced much more dramatically by steel margins in recent months, instead of fixture volumes.
Speaking at a seminar organised by New York Maritime last week, Mr Nokta explained why the capsize freight rate crashed from $230,000 a year ago to $5,000 a day in a few months.
He said that while steel prices in 2007 jumped from $400 a tonne to $900 a tonne, raw material prices rose by only $100 a tonne.
A year ago, steel sold for $900 a tonne, against the manufacturing cost of $500 a tonne. The margin was traditionally more in the $300 range.
As the margin widened, steel plants began producing more steel to take advantage of the bigger profits, and “out-hustled each other to get any and every available ship”, Mr Nokta said.
“The shipowner obviously benefitted,” he went on. “However, the shipowner also was the first person to feel the decline as the market reversed.”
Mr Nokta and Dahlman Rose were among the first market seers to predict an impending market crash in the dry bulk space last summer. Rather than talking up any extraordinary qualities, Mr Nokta told the Nymar audience that his foresight was entirely due to his constant monitoring of steel prices.
“We began seeing a tapering off in Chinese construction, which was a harbinger of lower steel demand,” he said. “Sure enough, this is what happened. As the market unwound totally, the rate dropped to $5,000 a day.”
The market did subsequently rebound to $25,000 a day and beyond, as the steel situation stabilised. However, the capesize spot rate remained flat at around the $28,000 mark because of falling steel prices until last month.
Now, however, the pricing trend has reversed and steel margins are expected to improve as a result.
Chinese rebar has traded at $495 a tonne for much of April, and since the beginning of May has been on a “solid uptrend”. As of Tuesday morning, the price was up to $520 a tonne.
At the same time, steel-making costs have increased by only $10 a tonne since the last week of April. Chinese steel margins, as a result, have improved to $210 a tonne right now, compared with $195 a tonne in late April.
“With steel prices seeing significant strength in recent days, we expect freight rates to be supported,” Mr Nokta said.
“Based on current margins, we expect capsize rates to move higher, to at least $35,000 a day, and could push even higher should steel prices continue to firm.”
Recent history supports this theory, Mr Nokta believes. Capesize rates had increased to $40,000 a day right after the Chinese New Year, as steel margins had widened to $220 a tonne.
“We believe the same could be possible this time around as the steel-firming trend continues.”
Nonetheless, at last week’s Nymar seminar, Mr Nokta advised his audience against being too carried away by these harbingers, or expecting that these would spark an immediate worldwide dry bulk recovery.
“It is true that iron ore accounts for 30% of China’s trade, but when it comes to the world cargo markets for dry bulk ships, China is still the only game in town,” Mr Nokta said. “Many other markets in the rest of the world still face the reality of 50%-60% lower steel production.”
The Dahlman Rose research note said steel production in China has increased 2% this year due to stronger-than-expected demand, compared with declines of 33% outside China.
Source: Lloyds List
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