The market for capesize bulkers should continue declining amid lower iron-ore and steel production for the rest of 2021, according to brokers.

The capesize 5TC, a spot-rate average weighted across five key routes, slid 4.9% on Thursday to $57,374 per day, making for a rapid decline of 34% over the past two weeks.

The paper market pointed to even lower rates well into next year's first quarter, according to Baltic Exchange data.

The forward freight agreement (FFA) rate fell steadily over the next five months to $23,057 per day for February after losing $622 per day.

Lower iron-ore guidance for 2021 from behemoths Vale and Rio Tinto and China's plans to curb steel production are weighing on market sentiment, said Rebecca Galanopoulos Jones, head of research at London broking house Alibra Shipping.

"The latest figures from the World Steel Association forecast that for 2021 as a whole, steel production will contract by 1% from last year, with growth in 2022 expected to be flat," she told TradeWinds.

Lower iron-ore guidance may cause capesize bulker rates to keep falling, brokers say. British miner Anglo American extracts the commodity from its Kolomela mine in South Africa. Photo: Anglo American

China's annual steel demand is expected to stay at 985m tonnes through 2022 amid a slowing real-estate sector and government cap on steel output for environmental reasons, according to association statistics.

On Wednesday, Vale lowered its fourth-quarter production forecast for high-silica, low-margin iron ore by 4m tonnes amid less demand.

"This movement does not change our production guidance for the year, of 315m tonnes to 335m tonnes but should take us below the middle of the range," the Brazilian miner said.

"If this scenario persists, we should also reduce the offer of low-margin products in 2022 by around 12m to 15m tonnes.

"The purchase level of third-party ores may also be adjusted accordingly."

A week ago, Australia's Rio Tinto lowered 2021 iron-ore guidance to 320m tonnes to 325m tonnes from 325m tonnes to 340m tonnes amid delayed mine upgrades at Gudai-Darri and Robe Valley.

Average capesize spot rates should end up between $40,000 per day and $50,000 per day soon, but they will not end up there because of the lower iron-ore guidances, said John Kartsonas, founder of asset-management advisory firm Breakwave Advisors.

'A psychological element'

"This is not surprising and definitely is now priced in the futures curve," he told TradeWinds.

"There might be a psychological element to it as people read the stories in the last week, but the loss of cargo is marginal in such a tight timeframe."

The falling rates may hurt dry bulk equities in the near term, but they may recover after owners' third-quarter operating results come out, Noble Capital Markets analyst Poe Fratt said.

"At this point, I don’t see the fundamentals changing," he told TradeWinds.

"Maybe demand will ebb as we enter the new year with less congestion and lower steel production, but the supply side appears very supportive of continued attractive dry bulk fundamentals."

Strong coal demand should help support the capesize market by offsetting a weaker steel sector, Jefferies analyst Randy Giveans said.

"As such, we expect rates to stabilise in the $40,000 to $50,000 range in the coming weeks, and the fourth-quarter average to remain above $50,000 per day," he told TradeWinds.