Dry Bulk Market: The End of the Road for Iron Ore

One thing that has confusingly held true up to now was that, against all the trends of many other commodities and market, iron ore kept on rising. It has been the black sheep of the markets, standing there, teeth gritted, weathering the storm that had swept away many other markets. However, just as other markets seem to be turning a corner, iron ore has come to the end of its bullish run.

Picture the scene. It’s last week. News of the increasing numbers of virus cases across the world tragically continues to rise, talk of a second outbreak in the north east of China dashes some of the optimism of an end to the crisis. But there stands the Platts 62% iron ore contract at nearly $100.

Picture the contrasting scene. It’s today. More parts of the world announce and implement the easing of lockdown measures. Dominic Cummings (the UK government’s chief advisor) travels 250 miles to Durham, breaking lockdown rules, and then decides to test his eyesight with a drive. Brent Oil recovers to above $36/bbl, Capes up. FTSE up. Dow Jones up. Iron ore down to around $95.

It seems that we have come to the end of the road of the meteoric rise of iron ore. We may go through a further phase of attempts to breach the $100 level, but with weakness appearing in the back end of the curve and limited stimulus from the Chinese government, the factors on the demand side to push things higher don’t seem to be there. Things may change if the supply side is significantly impacted by the worrying increase in virus cases in Brazil, but for now Vale hasn’t adjusted its production targets.

For other commodities it seems less the end of the road and more the start of a new one with oil, oil products and freight all rising. Brent has recovered to over $36 at its highest this week, with HSFO prices up around $2 from last Friday. However, 0.5% fuel oil prices have suffered from a relatively lower gasoil prices, dropping around $10-15 and also compressing the Hi5 spread (difference between the HSFO and 0.5% compliant fuel). Like an annoying ex-boyfriend, the news stories on an extension to OPEC cuts and belief in returning demand won’t go away and are building a strong floor to sentiment.

Dry freight rates popped up at the end of last week and are continuing to hold steady, with cape time charter rates reaching around $4200 in the middle of this week. There is cause for concern again on the news of the increasing virus outbreak in Brazil – as it’s such an important exporter of iron ore – but for now it hasn’t had a major effect on rates.

Wet FFA markets have also recovered with Jun contracts in TD3, TC2, TC14, TC5 and TD20 all rising. Last week’s dead physical market is reviving somewhat, and with the restrictions being relaxed across both sides of the Atlantic and the Pacific area getting back to some sort of normality, rates will continue to firm along with an increase in physical business.

As in life, it’s the same in commodities. As one road ends, there’s the start of another. Iron ore may be running out of steam, but from this week’s action, we could be seeing the beginnings of significant recoveries for freight and oil rates.

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Source: FIS

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