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The haggling over iron ore prices between the mining giants and China will dominate the outlook for key shipping indicator the Baltic Dry Index over the coming weeks, with an agreement the key to the index's long term recovery.
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The index, now at 1,974, has staged something of a recovery since January when the it fell as low as 925, technically below the cost of shipping, but remains a pale shadow of last year's 11,793 all time high. Nevertheless, at the current level ships are transporting goods at a profit. In the short term, the negotiations between Australian miners BHP Billiton and Rio Tinto and major Chinese steel producer Baosteel could have a profound effect. The market expects that Bao Steel will demand sharp price cuts of between 40 and 50 per cent to reflect the declining demand for steel products, with stockpiles rising in China. Bao's rates will be used as the benchmark for all other Chinese steel mills.
An agreement is usually concluded around Easter but the threat of lengthy talks this year is weighing down the index. Ship owners have used the interim period to scrap ships to help maintain rates as scrap metal prices have stayed relatively stable at around $300 per tonne. The scrapping rate for the first three months of this year has already exceeded the entire total for 2008.
A resolution to the iron ore price question would help the shipping industry, but it will still take sometime before the scrapping rate and increased activity translate into a fully fledged recovery. We remain bearish on the shipping sector for now.
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