One of the most important factors that dramatically affected the international iron ore and steel trade in 2007 was the sharp increase in freight rates. For 2008, the expectations regarding freight rates are diverse. While most people predict that freight rates will continue to increase in 2008 due to the continuing strong demand, others believe that the rates will decrease because there are many new vessels under construction, which are getting ready to sail in 2008.
Recently, some officials from China's biggest ocean shipping corporation COSCO pointed out that the bulk commodities trade and ocean shipping business is currently going through a golden period. According to the officials, the overall international ocean freight rate for bulk shipping is also expected to go up and remain at a high level in 2008. The huge quantities involved in the iron ore trade are the most powerful guarantee for this trend.
According to the figures in early 2006, there were a total of 47,681 ships in the global fleet trade. 38 percent of these were general cargo ships, 25 percent were tankers, 14 percent were bulk carriers, 12 percent were passenger ships and seven percent were container ships. The entire shipping capacity of these ships was 647,075,000 gross mt.
In 2007, it is estimated that the global shipping volume will be around 780 million mt, up 8.5 percent from last year. In 2008, This figure will near 830 million mt with an increase of around six percent increase. Iron ore exports from China are estimated to account for nearly 50 percent of the total trade volume with 400 million mt in 2007, up nearly 23 percent year on year. The effect of this increase on ocean freight rates is undeniable.
On November 28, the ocean freight rates for iron ore from Brazil and Australia to Shanghai/Ningbo were $89.53 and $35.82 per mt respectively. In mid-November, these figures had even reached $96 and $38 respectively. The freight rate from Brazil is already much higher than the FOB price of the iron ore itself. Only a few years ago, the same ocean freight rates were less than $10/mt.
Nearly one third of China's imported iron ore is shipped from Australia, with a quarter and a fifth of the imported iron ore total originating in Brazil and India respectively. Due to the Indian government's export tariffs on iron ore exports, as well as the higher prices, Chinese importers began to shift their imports from India to Australia and Brazil. However, this placed a new pressure on long distance ore ocean shipping and pushed freight rates to a higher level.
Apart from the strong market demand, there are two other important factors that have led to the ocean freight price hike. The first is the cost hike implemented by the ocean shipping companies. The depreciation of the US dollar, fuel oil price hikes and increasing crew salaries are the major problems facing the shipping companies. The second factor is the activity of international speculators. It is clear that international capital speculation has been targeting the ocean shipping market for a long time now and that speculators have successfully pushed up some ocean freight rates. In late August 2007, the 40 percent price hike in the India-China ocean freight rate within just two weeks was partially due to the activity of speculators. This is a phenomenon which needs to be given the attention it deserves in the future.
Chinese steelmakers are also under pressure to pass on the rising costs deriving from ocean freight rates and iron ore to their customers. Partially due to the expectation of a price hike in iron ore and ocean freight rates, Baosteel increased its ex-factory price for Q1 2008 and set an example for the other local steelmakers in China.
If Chinese mills continue to concentrate on Australia and Brazil for their iron ore purchases, then the freight rates will inevitably continue to increase until the newly built ships start to participate in the trade.
Nevertheless, Chinese steel export quantities are expected to decrease further in 2008. It is estimated that in 2008, China's finished product exports will amount to 36 million mt, down 24 million mt over the previous year; semis exports are expected to be around one million mt, with a decline of 5.3 million mt. Calculated as crude steel, China's total steel exports in 2008 are thought likely to drop 31 million mt to 39 million mt, accounting for seven percent of the national steel output.
With Chinese steel products out of the American market, China's exports to the European and Middle East markets have fallen as well. Even in some Southeast Asian countries and regions, buyers have turned to CIS materials due to the high price of Chinese products. As a result, the decrease in Chinese steel exports to far-away destinations may result in a relaxation in the tightness of ocean shipping capacity.