Flooding in Australia affects dry bulk shipping


The flooding in Queensland is primarily affecting the important coal export from Australia. Iron ore which is exported out of West Australia is not directly affected yet

The flooding in Queensland is primarily affecting the important coal export from Australia. Iron ore which is exported out of West Australia is not directly affected yet, even though that area has received much rain also. Lower steel production and thus also lower seaborne volumes of the two key dry bulk commodities is set to impact the market negatively over the next months.

Australia is the world's largest overall coal exporter, No. 2 in thermal coal exports after Indonesia but second to none in coking coal exports. Australia is a key global coking coal supplier, accounting for 60% of global seaborne exports. Within thermal coal Australia accounts for 20%. Thermal coal is used for power generation and heating, while coking coal is used in the production steel. As we have already seen, coal customers will try to find other ways to satisfy their demand for thermal coal but the real trouble is coking coal - as it is very hard to get from elsewhere. A shortage of Australian coking coal means that the worlds steel producers, primarily located in Asia, can be forced to cut the production of steel and with it also the demand for iron ore.

Impact on commodity prices and steel production
A slowdown in steel production and iron ore demand is toxic to dry bulk shipping in general and for the larger vessels, Capesize and Panamax in particular. The iron ore contract prices for Q1-2011 have already been set at 7% higher than the previous quarter - but spot iron ore prices can still fluctuate and will move south on lower demand. China imports 40-50% of its coking coal from Australia. Japan, the world’s largest coking coal importer, is heavily impacted also. The flooding may see contract prices for coking coal hiking significantly due to spot prices going sharply up as a result of the tight market. A part of the mechanism behind the contract prices is the spot price development. This may result in coking coal prices moving from USD 225 per tonne in Q1-2011 up to USD 270-300 per tonne, according to several commodity analysts.

When the mines call force majeure, the steel mills must go to the spot market for coking coal - at a much higher price than the contract price for this important steel production ingredient - if they can get it at all. Alternative sources of coking coal are the US and Canada, but reports are that the tight market has impacted prices also there, leading to higher commodity prices. So if coking coal spot goes up on tight supply, iron ore spot price can go down as a consequence of lower demand. A price hike in coking coal will increase the production cost for steel in a market already running on low margins.

Impact on freight rates
All in all, the worst flooding in Queensland for more than 50 years is not only bad for Australia, it's also bad for shipping, as volumes on coal and iron ore go down considerably and more vessels are free on the market, putting pressure on the spot market for vessels.

The Baltic Dry Index is currently down at 1480. Such a low level has not been around since April 2009, when the market was moving away from the initial trouble provided by the break out of the financial crisis. Average Capesize time charter rate that has been falling since end of November is now down at USD 11,266 per day, trading lower every day.

Where will it go from here?
It is a string of events that cause shipping demand out of Australia to go down. Moreover, the market place is plentifully supplied with tonnage, so the fact that some of the commodities will be supplied from sources further away will only have very limited impact on the market.

The first quarter of 2011 does not hold great prospects for the dry bulk market, mainly because the oversupply of vessels is getting too heavy even for the "normal" inefficiencies of the market to make an impact on the freight rates. The Australian situation is set to affect the market for at least a of couple months, meaning that the situation outlined above will remain a drag on the overall market and freight rates for some time.

ThomsonReuters graphics on Australian flooding, coal and wheat regions:http://graphics.thomsonreuters.com/11/01/AU_FLOODS11.html

BIMCO - Shipping Analyst: Peter Sand PS@BIMCO.ORG

in Copenhagen, DK


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