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Baltic Dry Index crashes on weak iron ore prices

The Baltic Dry Index is sharply down. This has little to do with overall shipping trends, but is due to a sharp slump in Chinese imports on which global shipping depends

The Baltic Dry Index (BDI) has fallen from 4,074 points in the beginning of June 2010 to 2,482 points on Monday, 28 June 2010. The shipping index has dropped significantly due to the slowdown in iron ore imports. “A fall in the Capesize Index has almost an equivalent effect on the BDI. The Capesize Index generally caters to iron ore demand, which is currently weak. There is excess steel capacity, therefore, China will now need to stabilise and not continue steel production like it has been producing in the past two months. It will either look at lowering its utilisation or shut-downs. This has caused a fall in iron ore demand, affecting the Capesize Index and the BDI in turn,” said Shraddha Shroff, research analyst, KR Choksey.

Capesize rates that primarily reflect the shipping of iron ore slid 7.1% on Monday to $31,715 a day. Iron ore accounted for 29% of the total dry bulk commodity transported by sea in the first three months, according to Dewry Shipping Consultants Ltd, London.China had been producing steel at a significantly high rate, until last month. It recorded its highest-ever steel production in the past two months. However, this growth momentum in Chinese steel production has come to a halt due to weak steel prices and China’s internal economic issues, leading to lower demand for iron ore.

“In addition to the current global steel production scenario, China has also scrapped its rebate policy on imports. This in turn has made Chinese steel lose its low-cost advantage. There is no significant cost-competitiveness left. China’s cap on real-estate prices has also depressed the country’s steel demand from the real-estate segment,” said Ms Shroff. The Chinese government, in one of its measures to curb inflation, is trying to curb real-estate prices.

At present, China has an excess of steel inventory. It is expected to slow down its steel production further, leading to lower iron ore imports by the world’s largest steel producer. It has already banned Chinese traders importing low-grade coal, in order to arrest the rise in steel prices. Baosteel Group Corp, the nation’s second-biggest mill, was quoted in an international daily, saying that steelmakers in China may cut output next quarter, because of “weak” demand from auto and appliance makers.

Thomas Baldwin, an iron ore, freight and steel trader with Deutsche Bank in London was quoted in Taiwan News as saying that “both iron-ore and grain shipments from South America have been difficult to come by and the excess tonnage is beginning to build rapidly. Until more iron ore stems appear, it is likely that freight will continue to drift.”

All in all, going forward, Chinese iron ore demand is expected to be weak. “Not much movement is expected on China’s iron ore demand. There is also not much clarity on how long will the ban on Chinese traders continue,” said Ms Shroff.

The day rates for Capesize vessels will thus continue to be under pressure due to weak demand. This slump in the Capesize Index is likely to reflect on the BDI. This volatility in the BDI is also expected to affect the stock prices of Indian shipping companies. While the Indian shipping industry does not have any significant exposure to the Capesize Index, BDI is likely to have a negative impact on the day rates they operate at.

“We expect stable tanker rates, despite the fall in the BDI. Going forward, I expect the BDI to be volatile, depending on Chinese steel production,” said S Hajara, chairman and managing director, Shipping Corporation of India.

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COMMENTS

amar chouhan

7 years ago

i need some iron ore price index update daily

Cherry

7 years ago

Firstly, china did not scrap its rebate on imports - it was on EXPORTS. Secondly, china banned traders importing low-grade IRON-ORE, not coal. Whoever wrote this article, get your facts right.

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