Iron ore prices have reached an all-time high, with China’s domestic steel product prices also soaring to figures never seen before. Capesize rates remain in lofty territory above $42,000 a day, with miners keen to shift as much product at today’s record prices as possible regardless of freight costs. May 2021 futures for 62% Fe content iron ore CFR China traded as high as $230 per tonne today, having broken through the $200 mark for the first time ever last week. The high-grade Brazilian index, denoting prices for 65% Fe fines, has also moved to the highest-ever level of $263 per tonne. Speculators in China have piled into the futures market following the holiday period last week, prompting the Dalian Commodity Exchange to introduce increased trading limits and margins for some contracts from today. “This ferrous frenzy also comes against a backdrop of an extremely strong steel market and constrained seaborne iron ore supply,” brokers Braemar ACM noted in an update yesterday.

For the capesize FFA market traders, “The sky is the limit. As iron ore prices are moving up to US$ mid-200s per ton, freight rates are spiraling and mining companies are racking up profit, the Capesize FFA traders are already in a super-cycle mode,” brokers Lorentzen & Stemoco stated in a note to clients. Furthermore, the FFA market is paying close attention to the situation for crewmembers with a travel history to India, causing slower fleet productivity and thus increasing vessel capacity utilisation, changes that could sustain and lead to higher freight rates in upcoming months. Hot rolled coil (HRC) and rebar prices have continued to set fresh records over the past few weeks on strong global demand and a shortfall in output in some countries, helping to keep mills’ profit margins in positive territory. Prices of copper, iron ore and steel rebar have surged by 86 to 113% in US dollar terms over the past 12 months leading many commentators to talk about a commodities supercycle.

According to Braemar ACM, Australian iron ore producers are on track to ship around 85m tonnes this month, representing an increase of 25% month-on-month and the highest monthly volume since June last year, though sluggish growth in Brazil has meant that on a global level, monthly iron ore volumes are still below 2018’s pace. There is still plenty of leeway for freight rate prices to increase for capes based on the surging iron ore prices. The historical average percentage of freight on delivered iron ore from Brazil to China has been around 19%. If such a level is applied to current iron ore prices, the corresponding freight rate would be in excess of $50,000. “Miners can unquestionably afford to pay up today for freight in order to secure a very lucrative profit margin on the core business, and we believe such a trend will further increase in the months ahead as mothballed and greenfield iron ore mining projects come back to life around the globe,” Breakwave Advisors suggested in a recent report.

Almost all iron ore miners have a marginal cost of production of less than $65 a tonne and major miners that account for close to 85% of global production have a marginal unit production cost of less than $30 a tonne, making current iron ore prices hugely profitable. As to the potential for this cape run to extend over many months, the jury is out among analysts. Danish Ship Finance published its biannual shipping markets review yesterday in which it suggested today’s Chinese above average steel production would be short-lived. “The Chinese economy’s steel intensity had been decreasing since 2005, until last year when production took off. We believe Chinese steel production could remain strong over the coming year. From a long-term perspective, we believe China’s steel intensity will resume a downward trajectory. This represents a major risk to the [capesize] segment, as the fleet is young and positioned for future long-term growth,” Danish Ship Finance warned, going on to highlight the risk of shortened economic lifetimes for the sector.

Over the coming two years, 95 capesize vessels will join the fleet – three times the number of vessels older than 20 years, data from Danish Ship Finance shows. “Absorption of these into the fleet will increase the pressure on owners to scrap vessels prematurely in order to balance the market. The average economic lifetime may drop from 22 years to below 18 years by 2022,” the Danish analysts predicted.