Surging iron ore exports from Brazil and contracting vessel supply in the region will keep Capesize/VLOC vessels in high demand in the Atlantic, supporting the continued surge in freight rates, shipping consultancy Drewry explained.
Despite growing concerns of a slowdown in the global economy, spot rates reaching record highs in the Capesize market. The recent strength in spot rates is expected to continue over the remaining months of 2019 mainly due to the upcoming IMO regulations and the sharp recovery in Brazil’s iron ore exports.
Following the disaster in late January this year when a tailing dam collapsed causing widespread casualties, the iron ore supply from Brazil tumbled in the first half of 2019 with the country exporting less than 20 million tonnes of the ore in April 2019. However, after an approval from the court, iron ore supplies have now resumed.
Brazil’s iron ore exports registered a steep recovery, and in July the country exported 34.3 million tonnes of the ore which is more than 80% higher than the exports in April 2019. Strong demand for Capesizes to load cargo in Brazil created a shortage of tonnage in the Atlantic, leading to skyrocketing spot rates.
As Brazil exports most of its iron ore to the Far East with China accounting for the lion’s share, a vessel takes about 80-90 days to complete a round voyage. Hence, vessels that loaded cargo in June and July at Brazilian ports for discharge in the Far East would be available again for loading only in September and October respectively. With not many Capesizes/VLOCs repositioned in the Atlantic from other locations to meet the surging demand, spot rates are on an upward spiral, according to Drewry.
Additionally, in the run up to the impending IMO regulations, the effective supply of vessels has contracted. To avoid using expensive fuel and save on bunker costs, many shipowners are retrofitting their vessels with scrubbers before the regulation comes into force. This process takes about a month, during which time the vessels is removed from the operating fleet.
In total, 45 Capesizes/VLOCs were retrofitted during June-August which is equivalent to 3% of the Capesize/VLOC operating fleet in terms of dwt.
“We expect the momentum in retrofitting scrubbers to only increase as the IMO deadline approaches with almost 10% of the additional Capesize/VLOC fleet scheduled for retrofitting in the remaining months of 2019, taking the spot rates even higher,” Drewry added.