There's so much cheap iron ore flooding into China that rates for the ships that carry it are forecast to jump almost 70 per cent by June, even as the world's second-biggest economy grows at the slowest rate in 24 years.
Bookings of Capesize vessels, most of which haul the steelmaking commodity, surged 47 per cent to 90 a month so far in 2014 compared with a year earlier, Morgan Stanley in New York estimates.
Both the expansion and the average are the largest for the time of year since 2009. Freight rates will rise as high as $20,000 a day by the end of this month from less than $12,000 now, Arrow Shipbroking Group in London predicts.
Owners are securing the extra cargoes because project expansions started over the past several years by miners including Rio Tinto Group and BHP Billiton are now producing ore.
While that's creating a global glut and pushed iron ore into a bear market, global prices are undercutting China's by the most in five years. The commodity will average the least since 2009 this year and fall every year through 2017, analyst estimates compiled by Bloomberg show.
"As long as Chinese growth doesn't fall off a cliff and the iron ore price keeps falling, that's going to boost the global dry-bulk market," Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, whose recommendations on shipping companies returned 10 per cent in the past year, said by phone on May 1.
"All the biggest producers are closing in on big supply additions this year and next."
Rates for Capesizes rose 31 per cent to $11,829 a day this month, the highest for the time of year since 2010, according to data from the Baltic Exchange in London. The $16,298 they made in the first quarter was the highest for the time of year since 2010.
Freight swaps indicate the ships will earn $15,565 this quarter, the bourse's data show.
International ore with 62 per cent iron content at the Chinese port of Tianjin plunged 19 per cent to $105.10 a dry metric ton in the past year. It fell into a bear market in March.
The commodity currently costs about $20 a ton less than domestic Chinese supply, the biggest discount for the time of year since 2009, a formula from Bloomberg Industries shows.
"Smaller Chinese iron ore miners are being priced out of the market and this is only going to continue," said Jeffrey Landsberg, president of Commodore Research & Consultancy, a New York-based adviser to owners.
"Such a development is phenomenal for the shipping market. There's going to be an even larger demand for iron ore imports." He spoke in phone interviews on April 24 and May 2.
Some Chinese iron ore mining companies with higher costs will probably be forced to close, Michiel Hovers, BHP Billiton's vice president of iron ore marketing, said at a conference in Singapore on Wednesday.
That won't be the case for the biggest producers including Rio de Janeiro-based Vale SA, Rio Tinto in London and BHP in Melbourne, that have invested billions to expand output, betting on sustained demand growth in China.
The Capesize fleet will expand 3.9 per cent this year, less than half global trade growth in iron ore, according to data from London-based Clarkson Plc, the world's largest shipbroker. Growth in total ship capacity will slow to about 3.6 per cent in 2015, it estimates.
Some vessel owners anticipated the acceleration in China's demand, meaning a surge in freight rates could be short lived. Ship yards, almost all in Asia, have orders to build 258 Capesizes, about the highest in 2 1/2 years, according to data from IHS Maritime, a Coulsdon, England-based firm that maintains a database for the International Maritime Organization.
China's growth is also not poised to quicken any time soon. The economy that creates demand for 69 per cent of the world's seaborne ore and 19 per cent of its coal cargoes will grow by 7.3 per cent this year, the lowest since 1990.
Next year that will decline to 7.2 per cent and be little changed the year after, according to the averages of economist forecasts compiled by Bloomberg.
For the time being, China's slowing growth isn't hindering the shipping market. Australia's Port Hedland, the world's biggest bulk-export terminal, shipped a record 28.9 million tons of ore to China in April.
The cargoes are adding to a global oversupply. Goldman Sachs Group estimates seaborne supply will exceed demand by 145 million metric tons next year, the most since at least 2009. The bank anticipates the price of the commodity will drop below $100 a ton in 2015.
"The baton falls on Chinese imports to soak up material," Colin Hamilton, the London-based head of commodities research at Macquarie Group, wrote in an April 30 report.
Shipments from Australia will rise 19 per cent to a record 687 million tons this year, the country's Bureau of Resources and Energy Economics said in March. More than half of Chinese production is uneconomic at today's price levels, Jeremy Sussman, a research analyst at Clarkson Capital Markets in New York, said by phone on April 30.
Rates for Capesize ships will probably rise as high as $20,000 by the end of this month, according to James Leake, managing director of research at Arrow Shipbrokers, who's been a shipping analyst for 14 years.
"There's so much more supply of iron ore, supply is pushing the price down," Leake said. "There's a structural upside for Capesizes."