31/12/24
Viewpoint: Capesize peaks to be limited by low Panamax
London, 31 December (Argus) — Capesize rates on the key routes are set to finish
2024 close to their lowest levels in two years, in stark contrast to most of
this year. Volatility in the market increased throughout 2024 and this is likely
to continue into 2025. But low rates for the Panamax class and below will likely
temper any probable future spikes in Capesize rates, as charterers will look to
split cargoes rather than hike their Capesize bids. The average annual Capesize
freight rate from west Australia to Qingdao, China, surged in 2024 year on year
by 16pc to $10.09/t. And on the Tubarao, Brazil, to Qingdao route by 18.5pc to
$24.95/t. But there was significant volatility throughout the year as the
average voyage time increased significantly on the back of more traffic between
west Africa and east Asia, which meant that short-term shortfalls of tonnage in
specific regions was increasingly common. The only sustained rally for Capesize
rates this year was from late-August to early-October. But this was when the
market first started to split Capesize cargoes onto smaller vessels, which
remained inexpensive. This primarily took place in the coal segment, and
Capesize tonne miles (tmi) for coal cargoes dropped in October by 37pc to 103.4
trillion tmi, compared with October 2023, Kpler data show. At the same time,
Panamax tmi for coal cargoes rose by 14.6pc to 200.5 trillion tmi. This trend is
also likely to ramp up in 2025 as Panamax rates have been under sustained
pressure in 2024 and are likely to remain a cheap alternative when Capesize
rates surge. But this will affect coal to a greater extent than iron ore as coal
companies can switch between Capesizes and Panamaxes quickly, while for iron ore
producers in Australia and Brazil this option is typically not viable. The most
pressing question now is: how long will any particular period of low Capesize
rates last? Capesize rates fell sharply in early 2024, reaching a low in January
before rallying again in early February. But a repeat of this pattern is
unlikely in 2025 because it was driven in 2024 by the late onset of the rainy
season and low precipitation in Brazil. This year's rainy season started earlier
and precipitation is ample. Also, China's and India's lower currency rates and
high stocks in China's ports will probably cap trading activity for some time.
Iron ore exports from Brazil could remain low until the end of the rainy season,
likely in March-April. This is despite the recovery of the Carajas railway after
a December blockade and the expected restart of Vale's CPBS terminal in Itaguai
in January following maintenance. As a result, the Capesize market is expected
to follow seasonal patterns and remain low in the first quarter of 2025. But a
rebound may occur in the second quarter. In Brazil, when the rainy season ends,
increased iron ore volumes on the long-haul route will push Capesize tmi higher.
This could trigger a rally in the Capesize market, as the order book is still
low and the tonnage supply remains inelastic. The Capesize market saw several
brief rapid jumps, followed by equally rapid crashes, at year end. This trend
will likely continue in the second quarter of 2025 after the market recovers
from the usual first-quarter malaise. Along with the propensity to split coal
cargoes, the historically low dry bulk order book and increased shipments from
west Africa to east Asia have also been a key factor as it limits tonnage
availability and has made supply increasingly inelastic, driving up rate
volatility. Every time iron ore demand climbs quickly — especially in the
Atlantic — or adverse weather conditions occur in the Pacific and cause
disruptions on the route from China to Australia — a new spike in Capesize rates
occurs as the tighter vessel supply is unable to quickly respond. This
Capesize-Panamax tangent might be broken under certain circumstances: if
Capesize rates fall back to 2023 levels (like now) or if next year's grain
harvest is higher (particularly if China increases its buying of South American
grain and decreases its buying of US grain in response to Donald Trump's
upcoming tariffs), which pushes Panamax rates up. The Red Sea could also be a
factor in pushing Capesize tmi lower next year if it reopens, but this is highly
unlikely. Shipping association Bimco assumes it may happen in 2025 or 2026, but
it may last much longer, even in the case of a possible ceasefire between Israel
and Palestine. Capesize rates in 2025 will also likely be supported by higher
demand, along with increasingly inelastic supply. Shipbroker Howe Robinson
expects global iron ore trade to reach around 1.67bn t in 2024, up from around
1.64bn t in 2023. "Volumes may further increase in 2025 as Vale and CSN
commercialise their planned expansion projects," Howe Robinson said. China's
rising steel and automobile exports can still offset slow domestic steel demand.
The market potentially sees the first Simandou, west Africa iron ore cargoes in
2025, greatly increasing the average sailing distance for iron ore cargoes,
according to industry forecasts. A further driver to overall Capesize demand
will be bauxite exports from Guinea that could rebound, especially if EGA
finally solves its customs problems, which is yet to be solved at year end,
according to market participants. China's bauxite imports surged in August by
41pc year on year to a new record high of 15.5mn t, shipbroker Ifchor-Galbraiths
said. And the volumes will keep rising as China's alumina industry needs more
raw material. Global coal trade will continue to be less significant as Capesize
trade, in spite of the fact that is projected to increase in 2024 by 1.9pc to
1.47mn t, according to Howe Robinson. Bimco predicts that the trade may start
shrinking next year and beyond, falling by 1-2pc in 2025 and by 1.5-2.5pc in
2026, as the use of renewables in China rises and Indian domestic output
increases. But coal will likely continue as a balancing factor between Capesize
and Panamax markets. In summary, the Capesize market may continue to be slow in
the first quarter of 2025, while the market fundamentally remains inflexible and
undersupplied. This could trigger a series of new rallies around March-May, when
the rainy season in Brazil ends and demand typically increases. But cheap
Panamaxes will probably create a ceiling for any future rallies, setting a trend
for a more disrupted Capesize trade for 2025, until the new harvest comes. By
Andrey Telegin Send comments and request more information at
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