Lower iron ore supply depresses freight rates in 1Q

Lower iron ore supply from Australia and Brazil because of adverse weather conditions and reduced Chinese steel demand pressured Capesize rates in the first quarter of 2022.

The west Australia to north China rate fell by 32pc to a quarterly average of $9.25/t in the first quarter compared with the previous quarter. And the Tubarao to Qingdao rate fell by 24pc to a quarterly average of $22.95/t over the same time period.

West Australia exports fell to 2.34mn t/d in the first quarter, down by 13pc from the fourth quarter and by 4pc on the year.

Iron ore production levels at west Australia fluctuate seasonally because of adverse weather conditions, while production levels recover from the second quarter onwards. But the west Australian iron ore industry faced short-term disruptions because of Covid-19 workforce absenteeism, and long-term challenges to maintain production as mines age. UK-Australian mining firm Rio Tinto alone exported nearly 10mn t less in the quarter than in the same period of 2019, equivalent to 59 Capesize ships.

The January-April rainy season in north Brazil has contributed to production issues for Vale's iron ore, limiting an important source of Capesize demand in the Atlantic basin.

Vale had flagged a production impact of 1.5mn t in January and declared a temporary suspension of a rail line in March.

China's imports from Brazil in January-February fell by 5.8pc to 38.48mn t. Brazil's iron ore averaged 810,000 t/d up to 20 March, 10pc slower than in the first quarter of 2021, according to customs data.

This decrease in demand caused Capesize tonnage to build up in the Atlantic, pressuring rates downwards.

In addition to Brazilian and Australian production and logistics issues, Chinese iron ore demand also fell, with autumn-winter production curbs at steel mills exacerbated by a drive to avoid pollution during the Beijing Winter Olympics.

China's crude steel output during January-February fell by 10pc on the year to 157.96mn t.

The surge in coronavirus cases in China has resulted in a lockdown at the steel production hub of Tangshan. Chinese steel production is expected to increase this quarter as the lunar new year holiday is over and lockdowns to curb the spread of the coronavirus play less of a role. This could translate to more vessels needed to carry seaborne iron ore to China which could boost freight rates in the second quarter.

Freight rates in the first quarter were still higher than in the first quarter of 2021, by 16pc on the west Australia to north China route, and by 27pc on the Tubarao to Qingdao route.

But this should not be misinterpreted as strength in the shipping market. Bunker fuel prices were also significantly higher on the year, and time charter equivalent (TCE) earnings, subtracting costs such as bunkers that shipowners must account for, were actually 20pc and 13pc lower on the year on those routes, respectively, over the quarter.

By Natalia Gregoriou