Market and product

The cheapest iron ore in 31 monthsand the lowest shipping costs on record are poised to increasethe number of cargoes going to China, curbing losses for vesselowners enduring a seven-month run of unprofitable rates.

Capesizes, each hauling about 160,000 metric tons of cargo,will earn an average of $14,000 a day in the fourth quarter, themost in a year, the median of six analyst estimates compiled byBloomberg shows. While that’s more than the $10,500 anticipatedby forward freight agreements, handled by brokers and used tobet on future transport costs, it’s still less than the $16,700owners need to break even.

The 34 percent slump in iron-ore prices in the past yearmeans some Chinese mines will start curbing output, according toMorgan Stanley, the U.S bank that ships the most commodities.Declining domestic supply will spur the nation’s mills, makingabout 46 percent of the world’s steel, to import more of the rawmaterial, the biggest source of cargoes for Capesizes. (GNK)

“There will be a time when Chinese traders will come backto buy iron ore,” said Philippe Van Den Abeele, the London-based managing director of Castalia Fund Management (U.K.) Ltd.,an adviser to a hedge fund trading freight derivatives. “Themarket is bad and there are too many ships, but we should havesupport in commodity demand and a pick-up in rates. We believethe fourth quarter will be busy.”

Capacity Glut

Capesize earnings plunged 82 percent to $4,417 since thestart of January because of a capacity glut, according to BalticExchange data. Daily rates averaged $6,384, the lowest since atleast 2000, according to the London-based bourse, whose data areused as benchmarks for about 75 percent of commodity cargoes.

Iron ore at the Chinese port of Tianjin last traded at$116.60 a so-called dry ton and reached $115.20 on July 30, thelowest price since December 2009, according to the Steel IndexLtd., a unit of the McGraw-Hill Cos. Chinese mines start cuttingoutput when prices drop to $130 or less, Morgan Stanleyestimates.

When prices tumbled to $116.90 in October last year,Chinese imports jumped 29 percent the following month, customsdata show. Capesize rates averaged $28,557 in the fourthquarter, 67 percent more than in the previous three months.

China, which buys about 65 percent of all seaborne iron-orecargoes, has imported more in the second half than in the firstsix months of every year but one in the past two decades, datacompiled by Bloomberg show. Traders stockpile ore in the fourthquarter because freezing weather disrupts ports in the followingthree months, said Steve Rodley, London-based managing directorof Global Maritime Investments Ltd., which operates 64 ships.

Stockpiled Ore

Stockpiles at Chinese ports are already near their highestlevel in at least two years, according to data from ShanghaiSteelhome Information, a research company based in the city. Theinventories of 99.4 million tons are equal to about 14 percentof the nation’s annual imports estimated by London-based Clarkson Plc (CKN), the world’s largest shipbroker.

Mills may also need less ore after growth in the third-largest economy slowed for six quarters. Domestic prices forbenchmark hot-rolled coil steel, used for construction andpipes, fell 14 percent to 3,615 renmibi ($567) a ton this year,according to Metal Bulletin Plc. Output exceeded 60 million tonsevery month since March, when it was at the highest ever, datafrom the Brussels-based World Steel Association show.

When steel prices fell 14 percent in September and October,mills cut output for three consecutive months, data compiled byBloomberg show.

Fewer Cargoes

Fewer ore cargoes would exacerbate the glut in shipping.The Capesize fleet expanded 91 percent since 2008, when dailyrates as high as $233,988 spurred owners to order new vessels,Clarkson data show. Outstanding contracts at ship yards arestill equal to 20 percent of existing capacity, according to IHS Inc. (IHS), an Englewood, Colorado-based research company. The fleetwill grow another 14 percent this year as the number of cargoesadvances 4 percent, Clarkson estimates.

The glut extends to most types of shipping. The Baltic DryIndex, reflecting costs across Capesizes and three other vesselclasses, declined 52 percent this year. Rates for very largecrude carriers, hauling about 2 million barrels of oil, dropped70 percent, according to Clarkson. An index reflecting chargesfor six types of containers fell 36 percent in the past year, agauge from the Hamburg Shipbrokers’ Association shows.

Cie. Maritime Belge SA, whose Capesizes account for 82percent of its fleet capacity, will post a 16 percent decline in net income to 78.97 million euros ($97.8 million) this year,according to the mean of three analyst estimates compiled byBloomberg. Shares of the Antwerp, Belgium-based company arelittle changed this year and will rise 11 percent to 19 euros in12 months, according to the average of three predictions.

Iron Content

“You could see some pretty significant growth rates inimported ore,” John Wobensmith, the chief financial officer ofGenco Shipping & Trading Ltd., a New York-based owner of nineCapesizes, told analysts on a conference call Aug. 2. “You’regoing to see imported ore displace Chinese ore more and more.”

China’s ore is about 20 percent iron, compared with morethan 55 percent in Australia, making it more expensive toextract, Deutsche Bank AG estimates.

Ore prices have to stay under $130 for several weeks beforeChinese mines shut down, according to Carlos de Alba, an analystat Morgan Stanley in New York. They declined below that level onJuly 17. Production costs in China are about $140 a ton, basedon the iron content of the ore, Credit Suisse Group AG analystsled by Andrew Shaw in Singapore said in a July 11 report.

Steel Mills

Iron ore is the second-largest seaborne commodity aftercrude oil, Clarkson data show. It accounted for 66 percent ofsingle-voyage charters for Capesizes in the past 12 months,according to Fotis Giannakoulis, an analyst at Morgan Stanley inNew York. Chinese imports will expand 6.1 percent to 728.9million tons this year as domestic output shrinks 20 percent to329 million tons, Credit Suisse estimates.

“We’ve seen before that when the prices come down to thislevel and remain at this level, it becomes very hard fordomestic iron ore producers in China to maintain production,”said Erik Nikolai Stavseth, an analyst at Arctic Securities ASAin Oslo whose recommendations on the shares of shippingcompanies returned 29 percent in the past year. “There ispotentially going to be more interest for iron-ore imports.”