URSABLOG: Car Crash Magnet

For some reason this week I have been witness to more than my usual share of traffic accidents. Most of them were in the ‘just happened’ category, where you see people standing around in the aftermath, talking to each other or on their mobile phones. In some cases they were remonstrating with each other, and in the largest one (6 cars and two motorcycles) police redirecting traffic and pedestrians and keeping the drivers apart. But one stood out, which led me to think that some weird cosmic alignment was making me a magnet for car crashes.

I saw this one unfold in real time, and it was like watching a comedy. I was in Piraeus on my way to get my hair cut when I heard a bang, and some shouts: I looked up the hill to see a man running after a slowly moving truck as it careered driverless down the hill, bouncing off stationary cars as it went. The man reached the drivers’ door, opened it and reached inside to yank the handbrake as the van came to a halt embedded in another car.

The noise and commotion that followed was louder and more frantic than the incident itself; everybody wanted to get involved, everybody had an opinion. The owner of one of the damaged cars opened the offending driver’s door to prevent him from driving off, almost physically pulling the driver out. The van driver, showing considerable presence of mind, completed his delivery of an (undamaged) television to a nearby office and returned. The owners of the parking garage opposite were particularly incensed and perturbed because one of the damaged cars was supposed to have been safely in the garage: how were they going to explain that to the owners? By the time I re-emerged from the barber’s shop, fresh and shorn after my post lockdown trim, we had got to the post mortem document sharing phase. The van however had left the scene.

This spate of car crashes is good for shipping, even if in a very small way, adding to the demand for steel (repairs/replacement) and producing supply (scrap). Every little helps: global steel demand is expected to fall 6.4% this year according to the World Steel Association (WSA). Together with the organization for Economic Co-operation and Development (OECD), they predict a demand of 1.65 billion tonnes this year, rebounding to 1.72 billion tonnes next year in a ‘best case scenario’. Tellingly WSA Director General Edwin Basson did not share the ‘worst case scenario’ or any other scenario for that matter, so I guess we just have to trust them.

The shipping of the final product seems to be affected too. According to the China Iron and Steel Association (CISA), steel exports from China will decrease by 16 million tonnes this year, with imports rising by 5-6 million tonnes. China’s steel consumption between January and April this year was 302.18 million tonnes, up 2.5% on the same period a year ago. I’m sure you don’t need reminding but between January and April this year a lot of serious stuff was happening in China.

With all this demand (stimulus related no doubt) it seems that the dry bulk shipping market should react very soon, after all it’s what we’ve been waiting for. Iron ore should be being imported at record rates, surely? The sad news is that it is already.

We did a little internal research this week which I would like to share with you. Firstly we could find no evidence, despite the very poor freight market, of any layups of bulk carriers, except for the usual suspects of detentions for financial or technical deficiencies, so fleet utilisation is normal. Secondly we looked at the movement of capesizes, and what they were up to. It’s quite an interesting picture:

There are 1051 post-2000 built Capesizes (145-190,000 dwt) actively trading. 

Employed between Brazil and China:

11 Capes are now loading in Brazilian ports

17 Capes are ballasting toward Brazil from China

39 laden capesizes are steaming from Brazilian ports to China. 

There are only 3 Capes currently discharging or waiting to discharge in China having arrived from Brazil. 

Employed between Australia and China:

66 Capes are now loading in Australian ports.

There are 146 Capes ballasting toward Australian ports from China. 

One hundred fifty laden Capesizes are bound for China from Australia. 

There are currently 46 Capes discharging / waiting to discharge in China having arrived from Australia. 

The average speed of laden Capesizes is now at 10.7knots (ballast: 11.35knots), a one knot decrease since December 2019.  

Iron ore exports from Brazil to China in May were 16.35 million tonnes whereas Australian exports amounted to 63.27 million tonnes. China normally imports around a billion tonnes a year.

So, as it turns out, the problem is not that China does not want any iron ore, but there is not enough iron ore available from Brazil. Shipping is suffering from a lack of demand, not of cargo, but of tonne-miles. Most of the spot capes have been pushed to work in the Pacific; Brazil cannot supply enough iron ore, because of technical problems, Covid-19 issues so the stuff comes from Australia, despite the diplomatic and geopolitical tensions between China and Australia at present. China is cross with Australia, cross enough to impose barley tariffs, and threaten coal import restrictions, but not that cross to threaten the supply of iron ore. After all, they really need that.

Many people forget that it is tonne-mile demand - rather than a change in trade, or GDP, or the oil price, or interest rates, or souvlaki futures - that drives the freight market, and also forget that capes were already under some pressure after a burst of newbuilding deliveries from shipyards before the coronavirus really bit. People also forget that it is not the immediate cause of a crisis that causes the most damage, but the measures taken to deal with it and prevent it happening again that changes markets and lives.

Capes have suffered their own car crash again this year, but it seems unlikely that they would have avoided this downturn even if the coronavirus had not come to live amongst us. In fact it is hard to make any sort of investment case for capesizes until the ship recycling yards are fully open and ready for owners to send their ships up the beach. The Baltic Cape Index may have jumped over 40% on Friday, but 40% of nothing is nothing, and a standard iron ore fixture from west Australia to Qingdao remains stubbornly around $6 per tonne. With 146 capes ballasting down, this probably won’t change any time soon. Until more spot cargoes on the longer routes emerge the dry freight market will continue to suffer, however many real car crashes keep happening around me.

Simon Ward

www.ursashipbrokers.com