Market Perspectives October 4, 2013

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: A correction in ocean freight rates seems to be occurring, at least for the moment and in the Capesize market. So that may be a start to things? The Chinese are away on the Golden week holiday and vessel bookings have slowed accordingly. The market normally takes a step back during this holiday and that makes freight traders wonder what will happen when the holiday ends. Will the rally take off again or have things truly topped out?

As normally happens, there was more than one cause for the recent market rally. There was a 15 percent slippage (cancellation rate) in Capesize new building orders, and therefore fewer deliveries than previously anticipated. The total fleet newbuild order book experienced a 30 percent slippage rate. China increased steel production at a time when domestic iron ore stockpiles were historically low, which lead to a mad dash for replacement stocks and the freight to deliver such. There were also the heavy rains in Western Australia that limited ore exports from that region and caused buyers to increase shipments from more distant ports in Brazil. Additionally, there were better exports of grain and coal from the US Gulf, so we’ve experienced a bit of a perfect storm of causes leading to the rapid freight market rally of the last seven weeks.

I don’t think it is farfetched to predict that we will see a setback in rates over the next two months and lower rates in Q1 of 2014. However, Q3 and Q4 of 2014 will likely witness a turnaround for ocean freight markets and steadily rising rates going forward; provided, of course, that vessel owners don’t go crazy with new building orders in their excitement. Last week, I stated that my vessel rate indications erred on the high side of things and that turned out to be the case. This week you will notice some corrections to the rate structure.