Brazilian Iron Ore Exports Drop in May

A recent release by Brazilian officials showed that iron ore exports fell to 15.3mn tones in May, a drop of 35% from last month and a 2009 low. This is likely due to diminishing demand by the country's largest custom, China. A note released by Goldman Sachs confirms this theory stating, "Heavy rains in the north of Brazil and port congestion in China could have had a negative impact on Brazilian iron ore exports, but the main reason ... is likely lower iron ore demand from China due to high steel and iron ore inventories."

Over the past several weeks, the shipping industry has been experiencing a strong resurgence in activity primarily due to Chinese iron ore imports. However by the end of this week those gains began to reverse, as indicated by a drop in the Baltic Dry Index (BDI). I anticipate the BDI will continue to moderate as Chinese demand continues to diminish, and an over supply of new capacity hits the shipping sector. This will likely add risk not currently priced into equities trading within the space. Companies that have high leverage ratios due to over expansion will be most suscetpible to any downward pressure to shipping prices, while companies with limited expansion plans and low leverage will be better position to weather the coming storm.


For a more detailed analysis please see my column on international trade at TheStreet.com:
http://www.thestreet.com/author/1145075/michael-mcdonough/all.html