Why the seaborne iron ore trade is expected to rise in later 2014

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Iron ore 2H outlook

As the seaborne iron ore trade enters seasonally strong periods toward the second half of 2014, iron ore shipments will eventually rise, supporting shipping rates for Capesize and Panamax vessels. But how might the year-over-year growth look?

Iron Ore Production

New seaborne supply

The global iron ore trade is subject to seaborne supply and demand. The recent strength we’ve seen in Australia and Brazil’s iron ore exports, which has benefited Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Holdings Inc. (NM), the Guggenheim Shipping ETF (SEA), and Baltic Trading Ltd. (BALT), was largely driven by new production.

After years of development following sharp rises in iron ore prices, a large number of projects are finally coming online. Due to lower cost of production, these new supplies are expected to displace the high-cost producers in China that are running out of economical and quality ore.

According to Clarksons, a total of ~285 million metric tonnes of iron ore supply is expected to arrive between 2013 and 2016. Most of it will come from Australia in 2014 and 2015, followed by increases in Brazil in 2015 and 2016.

While Brazil’s contribution is expected to be limited in 2014, note that Brazil’s iron ore exports over the last three years have remained pretty much stagnant and that it takes longer to transport iron ore from Brazil to China than from Australia. So even an increase of ~20 million metric tonnes should support dry bulk shipping rates.

As the chart above shows, the iron ore seaborne trade after 2016 will be largely subject to iron ore demand and price differentials between key importing and exporting countries.

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