Ordem e Progresso!

In 2001 China imported about 92 mt of iron ore. At the time they sourced iron ore (and pellets) in countries like Sweden, Saudi Arabia, and the USA. These are countries that dropped off the suppliers’ list long ago. Back then, as today, Australia and Brazil supplied about two thirds of China’s imports. With the addition of India and South Africa the quartet’s share of Chinese imports has declined, but it still constitutes almost 90 % of the total.

Since 2001 ore imports have risen from about 92 mt to 440 mt, or, about 383 %. During the same period tonne-mile generation rose from about 569 btm to 2568 btm, or, about 352 %. The lower growth in tonne-mile generation compared to cargo volumes implies a reduction in average distance of about 6 %.  If we compare 2007 (instead of 2008) with 2001 the results are markedly different as growth in both volumes and tonne-miles were similar at about 310 %. Thus, something happened in 2008.

Looking into the data, it becomes quite obvious what caused this deviation from trend: Brazil’s exports to China rose only some 2.6 mt whereas Australia’s exports rose about 38 mt! A quick glance at the map explains the result as one tonne of cargo from Brazil generates about 3.5 times as many tonne-miles as a tonne from Australia.

We believe there are several causes for the “poor" Brazilian performance last year. During 1q08 Brazil reduced exports as a result of logistical problems. It is estimated that 1q08 exports were about 5 mt lower than in the preceding as well as the following quarters. Secondly, freight rates went sky high during the spring bringing about competitive disadvantages for Brazilian exporters. During the past two years the freight differential between Brazil and W. Australia to China has been about 35 $/mt and during May/June last year it was as high as 58 $/mt (on average). As a result, Brazilian volumes became extremely expensive, and we assume that only minimum of contracted volumes were lifted. Finally, Vale’s attempts to raise prices in the middle of the year were ill-timed. How the negotiations were conducted we do not know, but from news reports it is quite clear that Chinese buyers were angered by Vale’s move.

So, how does the future look? Not so good from our perspective. Quite a few people consider the Chinese stimulus package as a kind of silver bullet that will correct virtually everything, however, with respect to steel and steel-making raw materials we believe there are a few things that need to be taken into account. China exported about 70 mt of steel last year - this is not going to happen in 2009. Based on monthly exports during the last three months exports could easily fall to 25 mt in 2009. Will domestic demand be able to consume the balance of about 45 mt (representing some 70 mt of iron ore)? We don’t think so, and we expect Chinese iron ore imports to decline in 2009, not much, but around the 20-25 mt mark (or 5%, taking into consideration increased domestic demand as well as domestic iron ore output).  How will this affect sourcing? Given that we still see a freight disadvantage for the Brazilians of about 15$/mt, and given China’s interest in Australian upstream activities, we believe Brazil will be at the losing end of the stick (unless the ongoing price negotiations can bridge this gap).  The result will be an even stronger reduction in tonne-miles than the volume decline would otherwise indicate.

Since 2006 the growth rate in Chinese imports declined by about 3 percentage points to 16 %; during the same period the growth in tonne-miles declined 13 percentage points to 11 %.

The dry bulk market has a strong vested interest in Brazil’s success.