Iron ore drops and HSFO cracks at historical highs

Freight up.

Hello and welcome back to freight up, FIS's freight and quality

podcast. I'm Jess and together with Davide, we will be your hosts as we navigate

the seas with freight and commodities. Hello. So today

we will be hearing the latest freight update from our senior business executive

Ben Klang. Hao BEI from Shanghai will tell us about what's going

up and down in the iron ore market. And we will end with

Archie's meet, which is back in the podcast booth with us that will give

us his updates on the fuel oil market. But as per usual, let's start

with the main macro news of the past two weeks.

In the first quarter of the year, the British economy expanded by

1.3% year on year, slightly below the 1.5%

growth recorded in the previous quarter. Nonetheless, the result exceeded the

market expectations of 1.2% increase, according to preliminary

estimates. In the United States, producer prices fell

by 0.5% in April following a revised flat reading in

March. This unexpected drop defied market forecasts of

0.2% rise and marked the first monthly decline in the

producer price index since October 2023

and the steepest since April 2020.

Let's move now to China where the industrial Production rose by

6.1% year on year in April, meeting the expectations of a

5.5% gain. However, the pace slowed from March

7.7% surge, which had been the fastest growth in the industrial

output since June 2021. In Japan, the

annual inflation rate held steady at 3.6% in April,

unchanged from March. This remains the lowest level since

December. And now let's have a look at the latest

movements in the freight market.

On the Cape front, we saw a small increase over the course of the past

two weeks with the C5DC going from $14,354

13 to 15,000 yesterday.

Panamaxs have shared nearly $1,200 with

the P5DC hitting

$10,869 yesterday from

$12,075 two weeks ago.

Supramaxs haven't moved much. The S10TC

went from $10,224 of two weeks ago to

$10,271 yesterday. For the handy sizes,

there were two good weeks as the HS7TC went

from 9,978 DOL

to $10,567 yesterday.

I'm joined today by Ben Klang who will go through the freight market

for the last two weeks. Ben, welcome. Thank you Jess.

Great to be back on a more regular basis. It's good to have you back.

So, since our last podcast, which was on May 14, it seems like the

Capesize market has had a little bit of a drop. Can you walk us through

what happened over the last two weeks? The Capesize market

did see a slight drop since our last update. The

May contract started at 15,500

and it peaked at 16,300 on

May 16. But then on the May 19, it

hit a low at 15,001,50. And

then as of yesterday, May 27, the market

is hovering around 15, 3, 50 marks. So

overall it's a bit of a decline, but

it's been a relative flat with some fluctuations

in between. Got it. So it's not a huge shift, more, a little

decline. Yeah, exactly. It's not a massive drop, but it's

definitely been moving in the wrong direction. We saw

a bit more volatility early on in the reporting period.

This was particularly due to the easing US China

trades tension and some changes in the guinea

bauxite mining regulations. But then things,

you know, stabilized midweek as more fixtures started to

come through. Okay, interesting. And what about the Panamax market? It sounds like that

was also relatively stable, but you mentioned in your notes that there was also a

slight decline. Yes, that's right. The Panamax market has been

more or less flat, but there was a slight decline during the

period. The May contract printed at 10,800

on the May 14, peaked at

11,800 on May 23

and then fell back down to 10, 3,

25 by May 27. So, yeah, bit

of a drop, but again, not a huge change overall.

So it sounds like the market has been holding its ground in the smaller

vessel segments as well. So nothing particular to

report here? Yeah, pretty much. The Panamax market

was pretty stable in terms of activity, but the pressure is

starting to mount. With an increase in the ballast vessels.

We're seeing less demands from both the Atlantic and the Pacific.

So that's putting some downwards pressure on the rates. Of course,

not great news for the Panamax market. How about the Supermax market? Do we see

a similar pattern here? The Supermax market has also experienced a

slight decline, but it's been a smaller drop over this

reporting period. The May contract dropped just over

200 bucks. It hit a high of

104 on May 15 and closed around

102 to 5 on May 28. So

overall a bit of a fall, but it's. It's been

relatively stable compared to the larger vessel segments. Got it.

So I noticed some news about Capesize Volatility especially in the

first week of our reporting period. What was driving that?

The volatility was mostly driven by two key factors

easing US China trade tension that I mentioned

before and the revocation of the bauxite

mining licenses in Guinea. The bauxite situation in

particular wiped out some of the gains made the week

before and we saw a sharp sell off.

But then sentiments improved midweek as more fixtures

came through which helped to stabilize the market a bit.

So it sounds like the Capesize market had a little bit of

volatility there, not too much, but then recovered and things settled down.

How did last week go? Well, in week two,

things were still a bit challenging for the Capesize sector. Despite

some slight improvements in fundamentals. The

decline in bauxite exports from guinea offset the gains that we

were seeing from the iron ore and the coal cargoes. Pacific

activity remains strong, especially with expectations of higher

iron ore flows from Australia, but there's still some caution in

the market due to slower iron ore flows from

Singapore and the China Holidays at the end of

May. Right, so there's a few moving parts. Looking

ahead, how does the Capesize market look? Yeah, looking

ahead, Capesize cargo volumes are projected to increase

for the fourth week in a row, reaching 22.8

million tons. A big boost. It's expected in the first

week of June when Australian miners push for

volumes ahead of their financial year end.

It's expected to jump to 33.5 million

tonnes, which is obviously a huge increase. We should still

be cautious because despite this surge, iron ore

volumes may dip a little in week 22 due to

the industry event in Singapore and the holiday in China.

What about the Panamax outlook? Is there anything more positive there? It's a

mixed bag for Panamax. We're expecting a slight recovery in

shipments this week, up to 22.9 million ton.

However, it's still below the recent averages. The good news is

that the east coast South America grains are

expected to rebound to 4.6 million

ton and they could go up to 5.5 million tonnes

in the week after. There's still pressure on the market with

vessel supply continuing to rise, which could put a strain on

these rates. All right, and then lastly, the Supermax market. What's

the news there for the next week? Yeah, actually Supermax market

looks a bit more promising this week. We're expecting a

13% increase in demands with

shipments rising to 19.5 million tonnes. Coal

and mineral shipments are expected to drive this increase, you know.

However, if you look at the supply side we're seeing a rise in

available vessels with a number of Opus Supermax and Ultramax

vessels rising from 1528 on May

19th. So it's a bit of a balancing act. But you know,

overall the near time outlook for Supermax looks pretty

steady. Okay, so there's a bit of optimism there at least. Yes, it's a

more balanced market. In the Supermax segment, the increase in demand is

being matched by the increase of supply. So yeah, things are fairly

stable. More in general for the

shipping market, you know, I basically want to bring up something that I came

across in Lloyd's List this week. It's a topic that

obviously could massively reshape the shipping over the next decade.

Okay, I'm guessing this is carbon taxes. Yes, you will

be correct. I mean carbon pricing isn't so

such a far off idea anymore. The EU is leading the

drive, but it's emission trading system and the new

fuel EU maritime rules. And

of course from an environmental perspective this is of course

necessary and well needed. But from a financial

standpoint, this too. Are you

expected to add over $6 billion

in cost to the industry in 2025?

So can you give me a bit of a breakdown on how that would affect

shipping costs? For example, take a Panama ship

running from Santos to Rotterdam. As is the

example in the article, carbon costs jumps

from under 50,000 in 2024

to over 530,000 by 2030.

For a VLCC on a long haul route

like amongst it Singapore, the cost is even

larger. More than 1.9 million

in projected carbon costs by 2030. Yeah, and

how are shipping companies meant to deal with this? You know,

the more direct one is more fuel efficient vessels

are gaining an edge. Older ones are struggling to

compete. We're also seeing more dual fuel new build

ordered. But the question is would cleaner fuel be available

and affordable. But to be fair, you know the

shipping industry tend to innovate itself under

pressure. So hopefully this will in the long term

lead to a more robust industry that is ready for the next

generation. And with that in mind, I'm excited to say that Eric Hoffman

from Engine will be joining the FIS masterclass next week

and he'll go into this a little bit look at fuel oil in this new

regulatory environment. But thanks for the breakdown Ben. That's useful going into

it. Thank you very much Jess. Pleasure to be here.

And now I'm joined by Hao Pei, our senior analyst in Shanghai. Hau, thank you

very much for joining us. Thank you. So we have seen

a huge drop in the Iron ore recently. Maybe you can tell us something more

about the causes behind this drop. Well I think the huge

drop this round was more related to the

fundamental change of the market instead of the new Microsoft.

Well I think the tariff friction from the

last between US and Europe was fully digested because

US reset an exemption period to European countries

and there is no more European countries investigation

on China steels or any other exporting skills.

So I think that part was fine. But on the fundamental

side, the pig iron production China had

witnessed three consecutive weeks of decline. So this

marginal change has let the investors worry

about the marginal decrease on iron ore demand.

And there are a lot of steel mills started to

maintenance or cut their production recently

ahead of the rainy season normally started in June and

July and there will be monsoon weather in India

so which means that India consumption could be lower

at the same time with China. So I think both is going to

give the fundamental markets a hit but from my

standpoint I think those are just something that

normally happen and it's seasonally, it's falling the

fundamental figures so I think those should all fell into

expectations. So I think the already known stuff

has limited damage to the market normally I mean

historically in the extreme case I would imagine iron

ore could reach the low $10 from now

but it's still like yeah, I think it's generally a few dollars

probably the low of the year is going to be a few dollars

lower than last year but nothing gonna change too much. I'm not that

bearish to look at 70, 75 this year

instead I'm still looking at 85 to 90 as a

low of the year so far.

And we also seen instead like a huge jump in the

fob Australia coking coal on Friday what happened there?

Some of the meals in India were trying to produce more

steels before the monsoon comes by and normally

somewhere in June it could last continuously through the

summertime. So I think the demand becomes strong just

this week or last week just for the current two weeks trying

to pick up some stocks and productions of

steels instead of lack of supply

during the next few months. But there is no signals to

see how this will be sustainable in the next few weeks

because when there is really bad weather's coming by all the

mills have to stop so but it supports the current market.

Thank you very much Hao. Thank you David.

And now back in the boat with us used to be called the people's

broker actually it's been a while since we've used this terminology to

Archie, thank you very much for joining us again. Pleasure. Always a pleasure.

It's been a while. What's happening in the fuel oil markets? Well, to give a

bit of a crude roundup initially, it's been pretty

rangebound recently between sort of 63 and 66 in the

Brent front month future. I think people are very much looking

ahead to the OPEC meeting that's coming up. General consensus is that

they're still going to go ahead with the increases to

output which you know, naturally is pretty, pretty bearish crude.

But you know, you could argue has this already been priced in? A few

different reports say that there's a plan to increase the output by

411,000 barrels per month there or thereabouts.

Whether that's the exact sort of figure that comes through, whether that's the exact figure

that physically ends up happening is another question. But yeah, I think it is sort

of all eyes on OPEC meeting at the minute, sort of intraday. There, there's

been, there's been fluctuations with Trump headlines and whatnot that,

you know, we're still getting that. Obviously yesterday the moves were

basis Trump saying, you know, potential more sanctions on Russia. So we're sort of

seeing intraday moves purely sort of headline driven. But I think the main, the main

factor to sort of look at to see if we can break out of this

sort of 63 to 66 range at the moment. There's going to be this OPEC

meeting that's coming up. And when it comes to

high sulfur fuel oil, the cracks, I mean like they've been very high recently,

correct? Me, yes. No, 100%. They've been

historically record breaking high to be honest. So if we

looked specifically the 380 crack, so the Singapore high

sulfur fuel oil crack, as far as I'm aware from my time in the market,

this has always been negative, always, always been a negative figure. Which means,

which means effectively that the refinery is at a loss.

You know, the crack is a refining margin. So if a refinery was

to refine purely high sulfur fuel oil, that'd be

at a loss. Obviously that's not how it works, you know, so it's often a

byproduct of refining the cleaner fuels. But this is pretty much always in the

negative. Well, it has always been in the negative, certainly in my time in the

market. And it's traded as high as like positive four in the front

month, this 380 crack. So it's been, yeah, sort of record breaking highs. I think

it's sitting around the three dollar mark at the moment. So it has come off

a little bit. You could put that down to obviously people expecting

this injection of supply from opec. And OPEC crude is

typically very sour, meaning it's higher sulfur content, which means

often you get the more of that sort of high sulfur fuel oil as

a byproduct when you're refining the sour. Crude doesn't have anything to do with

the taste of the crude? No. Well, I mean try it if you want

how much you can take because obviously, yeah, the American crude is sweet, so maybe

that tastes a lot nicer. And then if you're looking at the European counterpart,

the high sulfur barges crack that is still just

about in the negative. It has traded parity a couple of times and might have

even traded like positive 5 cents or something. But again, you know, record

highs. It's hard to put a reason on it at

the moment. Obviously we ask a lot of people in the market, nobody's got too

much of a clear answer. We will have to wait and see a little bit

what's going to happen with the OPEC meeting fundamentally. And then like

of course the great question mark, which is what the, what Mr.

Trump is going to say. Of course. Of course, yeah. As for

the very low sulfur fuel or flat price that's sort of being moving around and

seeing quite a lot of strength in the Rotterdam crack which is dragging the

Rotterdam 0.5 fuel to higher prices. Single point five crack

a little bit more sort of steady. But yeah, still as per usual

sort of big intraday swings on the flat price due to the

due to the crude movements. Thank you very much Archie for joining us. Thank you

very much, mate. And that's it for this week. Make

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