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Capesizes continue to suffer earnings erosion

The capesize market has been suffering earnings erosion ever since the Brazilian mine disaster that dented iron ore availability. Since China is Brazil's largest buyer, tonne-miles have also been reduced

Capesize vessels are earning less than other dry bulk ship types, but there are optimists who say the market is nearing the bottom and should see an upturn soon

THE capesize market has been on a downward trend ever since the mining dam burst in Brazil curtailed iron ore production in that country, hitting tonne-miles.

The capesize rate is at the lowest level since February 2017 and capesize vessels are now earning less than other dry bulk ship types.

According to Fearnleys, this is usually “a strong sign that the bottom is in or at least very close”.

“This coupled with seasonal tailwinds starting in March should result in an imminent market upturn for the big ships,” the brokerage said in a note.

The average weighted time charter earnings slumped to $5,290 per day at the close on the Baltic Exchange on Thursday. That represents a 62% drop since before the dam disaster in Brazil on January 25.

Supramaxes are the highest earners at $8,215 per day, followed by panamaxes at $6,055 per day, and handysizes quoted at $5,543 per day as of the close on the Baltic Exchange on Wednesday.

“While mid-sized bulkers seem to have found a bottom over the last two weeks, the cape market continues to deteriorate following the Vale dam disaster,” Deutsche Bank said in a note earlier in the week.

“The cape weakness was driven by continued negative sentiment following the Vale dam disruption, which has also impacted volumes,” it said, adding that while there are market concerns over a potential slowdown in China, steel production in the country in January actually rose.

According to estimates by the World Steel Association, China produced 75m tonnes in January, up 4.3% from a year earlier.

JP Morgan said in a note that the capesize market was trading below cash breakeven.

“No relief was apparent in the capesize market,” the bank said, adding that average volumes coming out of Brazil amounted to just 2.8m tonnes in the past three weeks since the incident. That is below the average of 4m tonnes seen through 2018.

The weakness has also led to increased scrapping, the bank noted, with five vessels exiting the fleet so far this year.

The Vale dam disaster, in which hundreds of people lost their lives, has cost the production of more than 70m tonnes of iron ore, some of which will be replaced by other mines in the country, namely the S11D project which is seeing a continuous ramp-up.

Vale said last week that operations at the Fabrica and Vargem Grande mining complexes had also been suspended, although it is unclear how much additional output will be curtailed and for how long.

Market participants believed that the lost volumes from Brazil would be made up with Australian supplies, even with a lower tonne-mile effect, although some miners there such as BHP and Fortescue Metals Group have intimated that they will not be able to fill the shortfall, Banchero Costa said in a note.

Meanwhile, in more bearish news for the shipping market, operations at Anglo American's Moranbah North coking coal mine in Australia were halted last week, following a fatal incident which could result in supply disruptions if the suspension is prolonged, according to Bancosta. The mine produced about 7m tonnes last year.

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