Dry bulk shipping advice and updates, September 13–25

Part 9

Why traders expect iron ore prices to fall, benefitting shippers

Commodity prices and shipping rates

As we discussed in another series, Must-know: Commodity prices and dry bulk shipping stocks, commodity prices can have a significant impact on iron ore demand and China’s import volume. So it helps if investors can get a sense of where commodity prices will move in the future—the forward curve. If the forward curve for iron ore is upward-sloping, when future prices are higher than near-term prices, investors can expect the future prices of iron ore to rise, and vice versa. Although lower future prices may be negative, they will be positive for shipping companies that haul iron ore across the ocean if the catalyst behind the lower expected iron ore prices isn’t lower demand, but an increase in supply.

Iron Ore Futures Curve 2013-09-25Enlarge Graph

Downward-sloping forward curve

Based on data from the New York Mercantile Exchange, the iron ore forward curve remains downward-sloping. For the remainder of this year, contracts for delivery of iron ore at future dates are lower than the previous months. On September 25, a metric tonne of iron ore with 62% iron content traded at $134.45 in the market. That figure is expected to drop to $125 by the end of this year. For the first few months of 2014, iron ore prices aren’t expected to fall as much. This is likely a reflection that large mining companies located in Australia and Brazil could see turbulence as they face their own “wet season.”

Because of rains (hurricanes and cyclones included), mining operations could be negatively impacted. This has historically negatively impacted shipping rates. Following the month of March, however, prices are expected to fall further. Although this could be because of China’s lower expected growth at other times, the likely reason is the anticipation of increased capacity at large mining companies in Australia and Brazil that are trying to increase their market shares (see Rio Tinto to increase iron ore capacity, positive impact to dry bulk shippers).

JP Morgan EstimateEnlarge Graph

The Chinese government will try to keep growth stable

Lower iron ore prices, on the other hand, will hurt Chinese iron ore producers, which are some of the more expensive producers in the world. If the government doesn’t want to see further declines in profits among its domestic mining firms, it will have to step up demand for steel. Given the importance of China’s industrial sector in supporting stable economic growth and in continuous reform to grow the middle class in China, we mentioned how industrial output growth is unlikely to fall significantly at the end of July. But it is important to consider that China is trying to shut down expensive mines. The theory appears to be holding well, since economic activity has strengthened in China (visit the Market Realist Macro Trend page).

Implication for dry bulk shippers

So if investors see lower iron ore prices ahead, they should expect them to be a short-to-medium-term indication of increased iron ore shipments from Australia and Brazil. This bodes positively for Capesize rates and the share prices of companies such as Diana Shipping Inc. (DSX), DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM).

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