Capesize freight surge extends gap with Brazil iron ore formula

Increased dry bulk freight rates this week are further enlarging the gap with a long-term freight formula, currently benefiting Atlantic iron ore miners using it to sell on a FOB basis.

The freight formula has benefited miners for the last five months on average, as using a spot freight rate between Brazil and China would otherwise yield lower FOB Brazil prices for buyers, based on S&P Global Platts calculations.

Spot Brazil-to-China Capesize rates on Thursday rose to $17.25/mt, after averaging $12.10/mt in July.

The formula and freight rates are used to netback to a Brazil FOB basis iron ore reference 62% fines prices in China, which forms the base value in contracts for different iron ore grades, including fines, concentrates, pellets and lump.

Different moisture adjustment rates govern how the final netback is used for sales of the products.

A formula adopted by Vale and the wider industry using a fixed freight rate and bunker oil adjustment factor averaged around $11.46/wmt in July, from $11.42/wmt in June, according to Platts calculations.

The monetary gap between July’s formula derived $11.46/mt with the latest $17.25/mt freight rate value would account for substantially lower FOB prices, mainly used in sales to destinations outside China.

The spot Tubarao-to-Qingdao Capesize rate averaged $12.21/mt in July, from $12.512/mt in June, $14.09/mt in May, $14.37/mt in April and $15.19/mt in March.

Different moisture adjustment rates govern how the final netback is used for sales of fines, concentrates, and pellets.

There was a 75 cents/wmt difference in July, $1.09/wmt spread in June, a $2.49/wmt difference in the two rates in May and 2.69/wmt more paid under the formula in April, with $3.78/wmt more seen in March.

Other Atlantic region iron ore suppliers use the industry reference in their own sales, while spot freight may also be used.

Other producers have commented the need to track similar terms to buyers as offered by Vale, in case different pricing frameworks create complications during volatility in spot markets.

Iron ore buyers this year were said to have been given a new iteration of the netback formula, lowering the fixed freight value, while adapting the bunker adjustment factor closer in line with lower oil prices.