In the past couple of weeks, we have seen Capesize rates improve for a number of reasons. We look into why and if these levels can be sustained.

Typhoon drives congestion

As Capesize vessels were tied up in China due to the typhoon, queues at Chinese ports reached 12.6 mdwt, the highest level since the end of February. While this is still 35.9% below the highs of the year, it has driven some positive momentum in Capesize rates, particularly on the C3 route, which has increased by 24.2% since the start of the month, printing $23.1/t at the time writing. In the past two days, the queues have started to ease off, declining by 1.7 mdwt, suggesting port activities are starting to resume back to normal post-typhoon. The effects of extreme weather events are typically only impactful in the short term, as indicated by the already declining queues in China. While the C5 route briefly jumped above $10, the route was quickly marked back down below $9.5 as more tonnage appeared.   With the typhoon having passed, we can expect the current congestion levels to continue to wind down and the amount of overall available Capesize tonnage to increase.

Atlantic ballasters volume hits new low

This week, the number of vessels making the trip across to the Atlantic fell to its lowest weekly total so far this year. According to vessel tracking, 5.4 mdwt in Capesize tonnage headed West last week, compared to 8.5 mdwt in the week previous. Weekly ballasters traffic has averaged 8.4 mdwt over the past two years and thus the ballasting levels of the past week are likely unsustainable. As reported C3 fixing seems minimal this week, the miners appear to be waiting for more of the queues in China to unwind before making any commitments, as we should see more supply heading West as a result. If rates are to be sustained, it will then be up to the demand side, or we will see more softening on this route.

Capesize coal to increase into Europe

Now that the water levels on the Rhine have increased and barges are returning to capacity, ARA port coal inventories are on the decline. While the river levels were low fewer Capesize coal cargoes were arriving at the ARA region as the port storage was at capacity. Now the situation has eased, and European coal demand has remained high, we can expect more Capes arriving at the region. Capesize arrivals into Europe increased from the recent lows in July to 51 vessels in August. Coal shipments to the EU are now picking back up following a slow July, largely down to the reduction of coal out of Australia due to the heavy rainfall. With the Russian coal ban now fully in place, the substitute volumes, which were relatively slow to get up to speed now appear to be catching up. Capesize coal liftings in Colombia increased 18.3% MoM, which shipments from South Africa more than doubled on last month’s volume. However, these volumes are still considerably lower than the flows that were coming from Russia. If coal shipments continue to increase out of the above countries, this will be key in keeping a supply and demand balance in the Atlantic. Employment opportunities are then more diversified in the basin and keeps the open tonnage in the North Atlantic from all heading to Brazil and/or West Africa. Unsurprisingly, we can expect this trend to continue and this European coal story to remain a theme in 2023, based on the bloc’s energy requirements and falling pipeline gas imports.

Supply update

As the end to Q3 nears, it has been another very quiet quarter for the Capesize orderbook. Ordering for the quarter currently lies at 8 vessels compared to 24 in Q3 of last year. The total for the year is now at 17 Capesize orders. This is on pace to be the lowest year for Cape ordering since 2001. The continued uncertainty over future vessel designs is withholding most from committing to new tonnage. Although prices for newbuildings have come down recently, this is seemingly yet to tempt many potential buyers. While we do expect an eventual renewal of the Capesize fleet, the age profile suggests this is unlikely anytime soon. Only 2% of the fleet is aged 20 years or older, meaning the potential for significant scrapping is limited, while the share of the fleet only amounts to 10% for the age 15-19 bracket. Ultimately, we have now moved past the seasonal peak in Brazilian iron ore shipments and while long-haul Cape shipments into Europe are improving, it is yet to reach the volumes that would contribute to higher freight rates. Looking to Q4, China has yet to provide a long-awaited stimulus package to give its economy a boost, most recently keeping its key lending rates unchanged as it battles its weakening currency.