TOKYO -- Bulk shipping charges are at unusually high levels for this time of year. Prices for large vessels carrying commodities such as iron ore, coal and grains usually fall during the summer because of fewer shipping contracts. This year, however, they have rebounded sharply from an early-July low and remain strong ahead of the fall, when demand usually recovers. The major driver behind the rally is China's growing crude steel production and higher steel prices.
On Sept. 8, the average charge for a capesize cargo ship that can carry some 170,000 tons of iron ore exceeded $20,000 per day, a level not seen since late March. Compared to a low in early July, it is up more than three times. Thanks to an increase of goods coming into China from Brazil and Australia, the sense of oversupply in the bulk shipping market has eased.
China is producing crude steel at a record pace. Infrastructure investment has been strong ahead of a key Communist Party congress in October. Demand for steel for construction use is not showing any sign of abating. Demand also increased thanks to a government crackdown on low-quality steel. The illegal steel -- made by simply melting and molding iron scrap -- is said to have been used widely across China. The government cracked down on producers of the illegal steel. Legitimate steelmakers then increased production to make up for the lost supply, also pushing up demand for iron ore significantly.
Tighter environmental regulations by the Chinese government have also increased iron ore imports. Steelmakers import and use high-grade iron ore that contains large amounts of iron in order to increase production efficiency and to reduce air pollutants. "Imported iron ore is sold to steelmakers right away without being stocked," said one carrier broker.
Led by the rise in steel prices, the price of iron ore has been at high levels. Shipping companies are feeling less pressure to lower rates from commodity giants paying the freight charges for their exports. As a result, rates on Chinese routes from Brazil and Australia have gone up about 60-80% since early July.
Yet tighter environmental regulations can cause rates to fall back again. Major production bases in China, such as Hebei Province, have already decided to drastically cut production this winter as a measure to improve China's ever-deteriorating air quality. If production is cut, steel prices will likely rise further but demand for iron ore will fall. "The Chinese government is sensitive to changes in the market and it will probably increase [steel] production by relaxing rules if steel prices rise rapidly," said another shipping carrier broker. Many brokers share the same view but there is no guarantee that the current upbeat market will continue.
The bulk shipping market is generally prone to big swings in prices. The recent increase in steel production and iron ore imports is also partly due to a last-minute surge in demand ahead of the announced output cut. How high the market will go probably depends on what the Chinese government wants.