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Low BDI May Encourage Cargo Trade Flows
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Source:IHS Maritime 360

The Baltic Dry Index's nosedive to a historic low could encourage greater trade flows as freight costs become a smaller cost component across the commodity value chain.

The Singapore Exchange, which also facilitates the trade of freight futures, said that key consumer hubs are able to source coal/iron ore from wider and more disperse regions.

In thermal coal, this may lead to more South American coal being shipped to Asia, or Australian coal competing with South African material in India or Europe. In coking coal, it may give Australian coal a broader reach in the seaborne market, or enable exporters from the Americas to supply more to Asia.

The Singapore Exchange added that it could be more costly to cut output in a fixed cost-intensive business such as coal/iron ore mining, particularly when subject to take-or-pay contracts on infrastructure.

"It is possible that sustained lower freight rates may delay supply discipline and production cutbacks as producers' potential customer base is increased, in turn deferring any fundamental supply-driven price recovery in coal and iron ore."

Iron ore, coal, and steel account for approximately 60 percent of total dry bulk tonne-miles. In particular, iron ore and coal dominate Capesize and Panamax trade.

Rates for Capesizes, which primarily move iron ore and coal, continue to move independently of smaller bulkers having risen 48 percent year to date, although this is off a very low base and rates remain about 64 percent below their 2014 average. Panamax, Supramax, and Handysize rates meanwhile are down 45 percent, 43 percent, and 43 percent respectively since the start of the year.

While seasonal weather-related supply disruptions have been below average this year, the Singapore Exchange opined that a variety of other factors have contributed to weaker rates.

Such factors include: more stringent import requirements in China on coal imports; a rise in Valemax shipments (after China reportedly lifted its three-year ban on the vessels) that may have tempered the speed and extent of an anticipated recovery in Capesize rates; generally lower congestion at many major terminals; lower oil prices; and, a bearish vessel supply outlook for 2015.

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