Australian Ore Prices Unlikely To Hurt Dry Shipping

Implications: Tradewinds reported that Rio Tinto and BHP Billington have finalized contracts with Baosteel for an 80%+ increase in the price of iron ore out of Australia.  This compares favorably to the Vale benchmark achieved earlier this year for a 65% increase out of Brazil and reflects the freight differential sought by the Australians.  The impact on dry bulk shipping is likely to be minor.

Analysis: Australian iron ore ports are essentially half the sailing distance to China as their Brazilian competitors.  In a market where spot Capesize rates have recently spiked to near $300k/day, the freight portion of delivered cost is substantial.

Until this year, Brazilian and Australian miners have moved in lock step on iron ore prices, leveraging their unity to achieve significant annual increases.  The impact of the Australian departure from the "team" will be interesting to watch.

The impact on shipping is likely to be small.  Limitations on Australian export growth has kept this at the 2% annualized level.  As such, incremental demand for iron ore necessarily must come from other sources.  Brazil will still enjoy a lion's share of incremental growth, with a correspondingly higher demand in tonne-miles - the measure of shipping demand.

Of greater importance to shipping is the moderation in the growth rate for iron ore demand.  This is running at a lower rate than the last four years, and with the planned new deliveries in 2009 and 2010, is worrisome.  However, coal demand remains robust and is projected to remain so, which will offset iron ore weakness to a degree.