China ore demand props up freights as Australia jammed
China’s strong demand for coal and iron ore is adding to the upward pressure on freight rates, which have risen sharply as the ship line-up builds in Australia after storm disruptions early this month.
Industry officials and traders said there was no sign of a slowdown in Chinese iron ore demand, despite Beijing imposing tax changes on steel exports to rein in a sector that saw record steel output in May.
Chinese steel mills and ore suppliers are trying to nominate vessels to haul the mineral from Brazil after deferring some cargoes in the hope of lower freight costs, which climbed to all-time highs last month, shipping officials said.
This came as port congestion worsened in Newcastle in Australia, the world’s largest coal loading port, after bad weather disrupted exports. Utilities were sending vessels despite a long queue as they worried about low coal inventories.
“In the Atlantic, sentiment has gone up strongly following a recent setback in rates. Both (ore) buyers and sellers are trying to get ships,” said an executive at a major shipping company. “In addition, (Asian) utilities are nominating ships to fetch coal from Australia, though they’re aware they need to wait for a long time. They’re anxious of their low stocks …. I don’t expect much of a retreat in rates during the summer,” he added.
The Baltic index for large cape-sized vessels , used mainly for transporting iron ore and coal, rose 33.9 percent to 8,513 in the past two weeks after shedding a third of its value in a month from a record 9,687 hit on May 14.
SOUTH AFRICA, STEEL EXPORTS
To add to the tightness in the shipping market, some Japanese utilities have begun sending vessels to South Africa for coal as miners in nearby China were reluctant to fill a gap in the Asian fuel supply, widened by the Australian shipping delays.
“They’re getting coal from a distant origin. They’ve got a double strategy: While they are ensuring ships for eastern Australia, they are sending others to South Africa,” the executive said. Officials from the coal sector expected Chinese 2007 exports to slump yet again, with mines in Shandong, such as Yangzhou Coal Mining Co. Ltd , showing no interest in term foreign sales in ongoing 2007 price talks with Japanese utilities.
A source at China Shenhua Energy Co. Ltd , China’s largest coal exporter, said the 2007 price of $67.9 a tonne, hammered out with Japanese, applied for only 1 million tonnes of the total contract volume of 5 million tonnes.
Asked about the remaining tonnages, the source said: “They will have a new contract volume and a new contract price.”
In the steel market, the industry officials said China’s new tax regime, effective from July 1, was set to dent steel product exports in the second half, though brisk demand from the Middle East in particular was likely to limit the likely decline.
“The slowdown in steel exports will shift supply to the domestic market,” Macquarie Research said in its latest China Commodities Weekly.
“Will this pressure become a wake-up call to Chinese steel mills to cool down crude steel production in coming years? So far, we do not see any positive signs,” it said.
Macquarie expects China’s 2007 crude steel output to reach 500 million tonnes, up from 418.78 million last year.
An industry official in Beijing added: “They’re making so much construction materials. Still prices aren’t soft. This means domestic demand is very strong … They just do not have enough materials to build up basic infrastructure.”