Why ASX miners are cheering record high shipping costs

It isn’t normally a record that miners would be happy with, but the surge in shipping costs have given ASX mining shares a major advantage.

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It isn’t normally a record that miners would be happy with, but the surge in shipping costs have given ASX mining shares a major advantage.

The cost to hire a capesize bulk carrier hit an all time high as it went over US$40,000 a day, reported the Australian Financial Review.

The report quoted the Platts Cape T4 index. This index measures the hire cost for carriers that are typically used to ship iron ore from Australia to China.

ASX miners getting squeezed by record shipping costs

Depending on how contracts are structured, the increase hire costs could squeeze profit margins for ASX miners. These include the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price.

ASX coal miners, like the Whitehaven Coal Ltd (ASX: WHC) share price, could also be feeling some heat.

When bad news is really good news

But everything is relative. The big increase in shipping costs is giving our iron ore producers an advantage over their Brazilian rivals.

This is because it takes around 10 to 15 days for ASX iron ore producers to ship the commodity to China over a distance of around 4,000 nautical miles.

The distance between Brazilian and Chinese ports are more than three times further!

Turning of the tides

Strong iron ore demand, especially from China, is driving up shipping costs. What’s more, experts say there is no sign that demand is waning.

The Platts Cape T4 index hit US$40,994 a day on Tuesday. It was at $US5711 a day on February 11, according to the AFR.

The index was launched in October 2019. The previous peak it hit was US$30,000 a day back in October 2020.

What’s driving record shipping hire costs

It isn’t only robust demand for iron ore that’s putting upward pressure on shipping costs. Other commodities from coal to grain are also providing a tailwind for ship owners.

Then there is also the restoration of supply chains from the COVID-19 outbreak that’s also adding to demand for bulk carriers.

Temporary advantage to ASX miners

But the high prices for both shipping and iron ore may not last. The AFR reported that Liberum Capital believes inventory levels for iron ore appear to have normalised and ore prices could fall this coming month.

This is partly because Chinese export rebates of 13% for some steel products expire from May. Demand for our iron ore may be peaking, although the outlook for most commodities remain strong.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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