The capesize market is pulling back from the highest rates in seven years on fears that China may take a tougher stance on Australian commodity imports after it walked away from trade negotiations. China’s National Development and Reform Commission said on May 6 it would “indefinitely suspend” all activities under the China-Australia Strategic Economic Dialogue because of what it described as Australia’s “ideological discrimination” against the country, according to media reports. The news sent Forward Freight Agreements plummeting in the capesize segment, with May dropping to $39,750 at the close on Thursday from $46,000 the day before, and June similarly falling to $38,750 from $43,400, according to figures from GFI shipbrokers.

“The neck-breaking rally… may have been unsustainable, but worsening tensions between Australia and China have also spooked participants, with the prospect of Chinese restrictions on Australian iron ore supply weighing on sentiment,” Braemar ACM said in a note. “At this stage, those fears do not seem likely to be realised,” the brokerage said, given China’s dependence on its closest trading partner for the steel-making commodity. Australia supplies two thirds of China’s needs.

With the market moving up to such dizzying heights, some pullback was to be expected, according to Braemar’s research analyst Nick Ristic, who added that the sliding rates should not be of concern, given that the market is higher than where it would normally be at this time of year. The average weighted capesize time charter on the Baltic Exchange dropped to $41,514 per day at the close on May 7, down 3.1% from the day before and 7.4% lower than a record high of $44,817 per day on May 5 for the assessment of the 180,000 dwt vessel plying five key routes.

Peter Lindstrom, head of research at Torvald Klaveness, said that the fall in rates could be short-lived as massive trade growth is expected for iron ore and coal this year. The third quarter is seasonally strong, especially for volumes from Brazil. As long as iron ore prices were above $100 per tonne, miners will be shipping as much as they can, he said. Rates are currently above $200 per tonne. “The slide in rates could be some sort of correction or a breather in the FFA market, which went up by $20,000 per day in a month,” he said. “There hasn’t been any fundamental change in the market in the last days/week.” In addition, the discontinuation of talks between the two countries does not affect coal, as no volumes have been sent to China since the end of last year. Australian coal, which is priced at big discounts to other suppliers, has found outlets in Europe, India, and other Asian countries.

The Baltic Exchange said that while the draw back late this week was significant, the market “remains poised and primed for further healthy trading levels“. The Pacific basin was “busier for vessels” with strong cargo flow emanating from major charterers. While there were “more twists and turns” to be seen, other markets continuing to push higher made a good case for the “upward trajectory” to soon return in the capesize segment following this breather. BIMCO’s chief shipping analyst Peter Sand said the market had been “overly sensitive” and news of the negotiations breaking down may have got some participants nervous. The FFA market was after all “a sentiment barometer”.

Although China has been sourcing some iron ore from South Africa of late, the quantities are not sufficient to supplant Australian volumes, which means any sort of restriction by China on Australian supplies is regarded as unlikely. The sentiment was echoed by Wood Mackenzie’s senior economist Yanting Zhou, who said the suspension of activities was a sign of an escalating political dispute that would affect commodity flows, although iron ore was the exception. “China is unlikely to ban imports of Australian commodities which they rely heavily on as it will impact the domestic economy,” she said. “The government is more likely to raise the administrative cost for importing commodities from Australia if they want to take action.”

However, the bans on some commodities will continue until relations improve. On thermal coal, Woodmac’s principal analyst Shirley Zhang said that since a ban was effectively in place, she assumed the impact on coal would continue through 2022. For copper, its research director Gillian Moncur said that Chinese smelters remained closed to concentrates from Australia, with the “unofficial ban affecting trade” from the final quarter of last year reaching zero versus a peak of 108,000 tonnes in June 2020. Woodmac expects the annual volume impacted is about 1m tonnes of copper concentrate, which is “looking for homes in other Asia Pacific smelters”, Ms Moncur said. “This has resulted in China looking for concentrates from elsewhere, at a time when the market was very tight” due to weather-related issues and deferred shipments.