China's steelmakers confronted with shipping cost hike

China's steelmakers currently find themselves facing increases in iron ore shipping costs. It is widely forecasted that the average price of international shipping in 2007 will be higher than that in 2006. Due to their long term charter contracts and comparatively fixed shipping rates, the big domestic steelmakers such as Baosteel, Wuhan Steel and Ma Steel are expected to be less affected than the small-to-medium steel mills that import iron ore from overseas without long-term contracts with the shipping companies. The international shipping market is essentially seeing a continuation of the boom trend which began in the middle of 2006. The latest key international dry goods shipping price index BDI (Baltic Dry Index) issued on January 17 was 4481 points, while the BCI (Baltic Capesize Index) was 6169 points. The latter is closely linked to iron ore shipping because capsize ships are most commonly used in iron ore transportation. Although the above two indices dropped by 3.43 and 4.46 percent compared to last week, they are still up on the 2006 levels, thus entailing an increase in international iron ore shipping costs for China's importing steelmakers. In fact, from the first day of 2007, some world famous shipping companies made upward adjustments to their shipping rates. For example, Maersk and Hanjin Shipping, which are ranked first and ninth respectively among the world's shipping companies, increased their shipping prices by over 15 percent. The present high shipping rates are due mainly to the following factors: First, the current period constitutes the shipping mid-season for dry and bulk goods. Significant quantities of iron ore and coal are waiting to be loaded at the major ports across the world. The remarkable increase in ore being shipped leads to a shortage of cape ships and to disorder at the ports. This somewhat chaotic situation has not seen any great change since the second half of 2006. Second, due to strikes in Australia and Europe, many ships remained stuck in port, unable to resume their regular transportation activity. These are the key factors leading to tension in the shipping situation. It is forecasted that the total amount of iron ore shipped to China will continue to increase. Currently, after several rounds of price hikes, the price level of local iron ore is close to the CIF imported price. Due to the high quality of the imported iron ore, many local steel mills prefer to import rather than obtain supplies domestically. Under these circumstances, it may be safely forecasted that the comprehensive shipping price index will continue at a high level, at least for a considerable part of 2007. It is possible that the average BDI index in the first half of the year will be around 3000-3300 points and that the annual average level will reach 3500 points. If so, the increase margin will be in the order of 10 - 20 percent year on year. To offset the cost increase from the 9.5 percent price hike in the international iron ore prices for 2007, most local steel mills had pinned their hopes on a decrease in the shipping rates. However, it would now seem that such hopes will be met with serious disappointment.