Miners to feel the pinch of doubled freight rates in 2015 – report
JOHANNESBURG (miningweekly.com) – Citing consensus among shipping analysts that Capesize freight rates will double within the next year, fund manager Liberum Capital has cautioned about the impact of this on the margins of mining companies – particularly those in the iron-ore sector.
According to Bloomberg-compiled freight analyst consensus, record growth in seaborne iron-ore supply, combined with five years of declining investment in new vessels, would see Capesize rates doubling to $28 000 a day by 2015.
On the demand side, growth in iron-ore volumes, in particular, was expected to influence the market.
Iron-ore and coal volumes accounted for 93% of Capesize shipments.
Capesize freight rates were expected to double ahead of Panamax rates, which would likely increase by 81%; Supramax rates, which would see a 66% rate hike; and Handysize rates, which would increase by 57%.
Meanwhile, Liberum said in a report published earlier this week that the freight rates implied in mining analyst consensus were flat, leaving potentially significant downside to achieved iron-ore prices.
Further, it said freight inflation was more likely to be shouldered by iron-ore miners than by coal miners, as the majority of seaborne iron-ore production had costs “comfortably” below the spot price, while most of the high-cost capacity resided in China, meaning that higher freight rates were less likely to trigger significant capacity cuts at the current iron-ore price.
Among the major miners, the impact of higher freight rates would be significant, with downgrades to consensus 2015 earnings per share (EPS) of 13% for Rio Tinto and 9% for Anglo American and BHP Billiton on iron-ore volumes alone.
“The effect on realised coal prices is less clear, but Glencore and Anglo American’s profits are particularly exposed,” the firm noted.
The impact of higher freight rates on achieved coal prices was harder to determine, as 30% of the industry was already producing at cash negative margins, customers were geographically spread and the price was referenced on a free-on-board basis, Liberum pointed out.
“However, conservatively assuming a doubling of freight [rates] reduced achieved prices by $5/t, downside to Anglo American’s 2015 consensus EPS grows to -16%,” the report read.
Among the midtier iron-ore miners, Liberum said African Minerals, Ferrexpo and London Mining would be the hardest hit by rising freight rates, estimating that the three would be producing at a negative all-in cash margin in 2015 if freight rates doubled.
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