The Business of Mining - thebusinessofmining.com | July 7, 2010 | 8:35 am

“Owners of dry bulk ships and tankers face sharp falls in profitability after rates for the largest ships at least halved since May on fears about ship oversupply and weak global demand.

The fall-off could revive fears about the finances of the weakest companies, some of which are struggling to finance significant orders of new ships.



The average rates paid to charter Capesize ships – the largest dry bulk carriers – on the short-term spot market have fallen from a peak of $60,000 a day in mid-May to $23,012 on Monday.”

Source: Financial Times, July 6 2010


Observations:

  • Shipping costs are typically around 5-15% (Australia on low side vs. Brazil on high side) of the total cost of iron ore for Chinese steel makers.
  • Iron ore bulk shipping is mainly contracted in long term agreements with globally operating shipbrokers.

Implications:

  • The shipbrokers face very high capital costs and long lead times for their investments. They are fully relying on maximizing utilization of the carriers. As demand drops and capacity utilization decreases, transport price competition intensifies.
  • If the demand drop in China leads to a structural overcapacity in the transport industry, this will improve the competitive position of Brazilian and West African iron ore producers in comparison to Australian producers.

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