Empty iron ore ships switch to coal to survive China’s collapse
(Bloomberg) – Freighters suffering from weak Chinese demand for iron ore are finding a more lucrative alternative as the global energy crisis spurred an increased need for coal.
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Miners and traders are cutting shipments of iron ore, the second most traded maritime commodity, and reassigning their bulk carriers to highly unusual coal routes to support their income. Other vessels carry fuel from Russia to China and from Australia to Europe, according to owners, brokers and traders.
The freight shift comes as China’s deepening property market slump stifles hopes of a recovery in iron ore demand. Meanwhile, coal has seen a resurgence after Moscow’s invasion of Ukraine forced countries to replace Russian gas.
Bulk carriers generally seek stable long-term contracts for one product and stick to it, but when profits are better elsewhere, vessels may temporarily switch to other types of cargo.
Some of the largest iron ore ships, known as Capesizes, transport Russian coal to China and India. In a normal market, this strategy is usually avoided by traders because Russian coal ports like Ust Luga do not have deep enough waters for Capesize ships to fully load, forcing ships to take only partial cargoes.
But about 33 Capesize ships this year called at Ust Luga in Russia’s far northwest, compared to just one ship seen from 2015 to 2021, said Harry Grimes, analyst at Arrow Shipbroking Group.
Meanwhile, Australian coal is heading to Europe as the continent seeks to replace supplies from Russia, said Ulf Bergman, senior economist at maritime data provider Shipfix. The number of such trips in September rose to 26, a monthly record since the company began tracking data in 2017.
“The vast majority of shipments were on Capesizes,” Bergman said. “That obviously offset some of the negative effects resulting from the lower demand for iron ore.”
Capesize and Panamax vessels carried around 20m tonnes more coal in the first 10 months of this year compared to the same period in 2021, while they carried 18m tonnes less iron ore , Grimes said.
Admittedly, the increased focus on coal has not saved shipowners from the ripple effects of China’s economic slowdown. The Baltic Dry index is down 50% from a year earlier, following the poor performance of iron ore prices. And while global demand for coal is increasing, imports to China are slowing as the country increases domestic production.
Going forward, Beijing’s adherence to Covid Zero policies will likely continue to complicate the progress of construction projects, weighing on iron ore consumption and freight rates.
Shipping “desperately needs a healthy Chinese real estate market,” said John Kartsonas, founder of commodity investment firm Breakwave Advisors LLC. “Unless we see signs of recovery there, Capesize rates remain vulnerable to areas of significant weakness.”
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