The falling price of commodities such as coal and iron ore has been a thorn in the side of many miners during the past few years. However, most miners have been able to mitigate these declines by ramping up output.
What this means is that while the price of iron or coal is falling, export and mining volumes of the commodity are rising. Indeed, during the past five years the volume of iron ore exported from Australia has only gone up despite falling prices.
As proof of this, during May a record 37 million metric tonnes of iron ore was exported to China, and over the last six months the average monthly volume of iron ore exported rose to 33.4 million metric tonnes. What's more, analysts expect iron ore exports from Australia to China to expand 17% this year alone as China adds capacity.
Ramping up production
BHP Billiton (BHP 3.24%), one of the world's largest iron ore miners, is leading the trend in driving up its iron ore production volumes. The company recently upgraded its iron ore production target for fiscal 2014, as a multi-billion dollar workover program performed better than expected and is expected to lift fiscal 2014 iron output to 212 million tonnes, up from a previous target of 207 million tonnes.
What's interesting is that BHP has cut oil and gas exploration spending in favor of accelerating development of its new Jimlebar Australian iron ore mine. BHP also put forward the idea that the mine's output could be more than doubled over the next few years. According to Reuters, these activities signal that BHP finds iron ore mining to be more profitable than the production of oil and gas.
Meanwhile, Rio Tinto is ramping up Australian iron ore output by 10% for this year. Fortescue Metals Group also posted a 62% rise in September shipments.
Getting it there
All in all, this is good new news for dry-bulk shipping companies. More ore shipped equals more demand for boats, which equals higher shipping rates. Diana Shipping (DSX 5.92%) has a fleet of 35 dry bulk vessels, and currently only two of these Panamax vessels are employed by Rio Tinto; the rest are employed by agricultural trading houses such as Cargill and EDF Trading. Actually, one of the vessels was only recently hired by Rio, which could indicate a rising demand for the vessels. Still, the company has a number of new vessels entering its fleet over the next few quarters, and these could be quickly snapped up by miners.
DryShips (DRYS +0.00%) is another company that's in a great position to benefit from this trend. Indeed, according to data supplied on DryShips' website, the company has noted a recent explosion in shipping rates for Cape size vessels. The daily rate has shot up from below $20,000 a day to more than $40,000 in the space of a few months. What's more, the company reports that the average day rate for the four main shipping routes applicable for each of the three ship types the company has in its fleet, is up 17% year on year. So over the next few quarters, DryShips could be in for a rerating as higher rates filter through and the company returns to a profitable/cash flow positive position.
Foolish summary
The recent trend for mining companies to ramp up production of iron ore and coal to offset declining prices is already filtering through to shipping rates. More ore shipped will equal a higher vessel utilization.
