Logistics buyers are closely watching the state of the iron ore market for signs of an impact on the already record-high bulk ocean freight rates. The demand for bulk commodities like iron ore and coal play a major role in dictating bulk ocean freight rates. The outcome of negotiations for a benchmark iron contract or the fate of mining giant Rio Tinto could dramatically impact demand and rates for bulk ocean freight in 2008.
The biggest driver of demand of bulk ocean freight is China's steel industry, which is currently negotiating its benchmark iron ore contracts. Iron ore prices could rise 25% starting April 1, 2008, according to a Reuters poll of 12 analysts, with some looking for a 50% hike in iron ore prices. That level of increase would clearly have Chinese steelmakers looking at other areas-notably spiraling ocean freight rates-to reduce its costs. In late October, Luo Bingsheng, vice chairman of the China Iron and Steel Association, said increasing freight rates as well as iron ore prices are having a negative effect on the profit margins of Chinese steel mills. Baoshan Iron & Steel Co., China's biggest maker of steel, is an example, reporting a slump in profits recently. "In order to combat abnormally soaring freight costs, steel mills have been encouraged to jointly charter iron ore shipping capacity" and increase contracts to 80% of total shipments, or to collaborate with shipping companies on iron ore carrier construction, Luo said. In a recent Forbes.com story, Oppenheimer analyst Tim Tiberio said that if the BHP Billiton buy of Rio Tinto eventually goes through (or even if doesn't), China could choose to accelerate consolidation of its state-controlled steel and coal mining industries and create distortions in the supply chain which could impact dry bulk shipping demand in the near term. In a Wall Street Journal article, Annanya Sarin, spokeswoman for Corus, which purchases about 75% of its iron ore from big mining companies to feed its steel mills, said it is very likely that the steel industry will face further increases in raw materials prices and bulk freight rates, due to market tightness on account of strong global demand for steel products. Gideon Lo, an analyst at DBS Vickers, said in a recent Bloomberg report that the peak of dry bulk rates should happen in the first-quarter 2008 due to the pre-stocking of iron ores before the possible higher contract ore prices effective from April 2008. In the meantime, bulk ocean freight rates continue to set records. The Baltic Dry Index, an overall measure of commodity-shipping costs on different routes and ship sizes hit a record Oct. 29. DryShips recently chartered a Capesize vessel for 12 months at the rate of $139,000/day.
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