The significance of Brazil’s iron ore export
As home to one of the largest mining companies, Vale S.A., and the second largest iron ore exporting country with ~25% market share of global iron ore trade volume, shipments out of Brazil are a key metric to watch. Higher export volumes have a positive effect on shipping rates, which are a critical variable that moves dry bulk shipping companies’ revenues, earnings, cash flows, and share prices. However, when iron ore export isn’t growing as fast, it reflects weak demand for dry bulk ships. So shipping companies could be negatively affected.
Iron ore shipments on the rise
In September, Brazil exported 29.0 million mt (metric tonnes) of iron ore. This was a decrease of -6.89% from August’s volume of 31.2 million mt. On a year-over-year basis, iron ore shipment grew 4.86%, down from 13.19% in August. The six-month moving average figure, which smooths the trend, rose from -0.37% in August to 3.44%. Although the September figure wasn’t so encouraging, given the increase in rates we’ve seen, the long-term trend might be turning around.
Seasonal trends in iron ore shipments
Exports volumes out of countries like Brazil and Australia face seasonality. During the first few months of the calendar year, these countries enter a “wet season,” when they typically face heavy rain and floods. Such poor weather can temporarily bring mining operations to a halt, which can negatively affect iron ore prices and shipments.
During the second half of the year, export volume typically rises as these mining companies finish their expansions and Chinese mines start to close down for New Years. Knowing that Australia and Brazil’s supply could fall during the first few months of the year, traders could increase shipments before that, which reinforces the seasonal pattern.
Brazil lost market share to Australia
Over the past few years, iron ore shipments out of Brazil have fallen in growth. While shipments grew 10% to 15% year-over-year before 2011, they fell to close to zero last year. Uncertainty surrounding Brazil’s mining law (the possibility of higher tax) had kept producers away from increasing capacity, while the shorter distance between Australia and China had made Australian producers much more competitive. While Brazil made up ~34% of the total seaborne iron ore trade in 2010 and 2011, it has fallen to just ~25%.
Brazilian iron ore export growth could pick up pace
But export growth may be turning around—especially now that the mining law was finalized, pretty much in line with that industry experts and firm managers expected. This could be a long-term positive for shipping stocks like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).
Caution is needed, however. As Capesize rates recover, the Chinese government could allow Valemax—the largest dry bulk ship in the world that was ordered by Vale to be more competitive against Australian exporters—into Chinese ports. Such a move could signal that Capesize rates are in recovery, but it could negatively impact rates in the medium term. The uncertainty may be a reason why shipping companies aren’t jumping right into purchasing more orders, despite improvement.
- Part 1 - Idea: Do dry bulk stocks actually follow the Baltic Dry Index?
- Part 2 - New purchase orders suggest bright outlook for dry bulk shipping
- Part 3 - Shippers scrapped more vessels, but medium-term positive remains
- Part 4 - Stable construction: Why managers expect medium-term higher rates
- Part 5 - Why lower capacity growth will support dry bulk shipping rates
- Part 6 - Iron ore inventory still low, good for dry bulk shipping stocks
- Part 7 - Lower iron ore prices will support dry bulk shipping companies
- Part 8 - Brazil exported less iron ore but September trend still favorable
- Part 9 - Australia exported record iron ore in September, a positive trend
- Part 10 - Higher new build prices mean higher dry bulk shipping share prices
- Part 11 - Why second-hand ship values suggest dry bulk shares will climb
© 2013 Market Realist, Inc.