The dry bulk market, which posted more positive freight rates in October, is set to plummet by January 2018 with the largest drop expected to come from Capesize earnings.

According to Maritime Strategies International, iron ore imports to China remain the strongest driving factor despite the downside risks amid Chinese government-enforced cuts in steel production.

The most recent steel data available show a slowdown from the very high production levels of the third quarter, but there is still robust demand for tonnage for ore imports.

The contradiction of weaker steel output and stronger ore imports is partly explained by lower domestic ore output: September was the worst month for ore production since May with a 13% drop since the peak in June.

“This has been a key tenet supporting MSI’s forecast of stronger freight rates towards the end of this year and is an indication of Chinese steel manufacturers’ increasing preference for higher quality iron ore found in Australia and Brazil,” Will Tooth, MSI Dry Bulk Analyst, said.

“MSI expects that the Chinese government’s focus on pollution will see even greater shifts away from the use of domestic ore with a lower iron content, due to the greater emissions produced,” Tooth added.

However, MSI forecasts a drop in spot earnings by January next year for all size categories with largest drop expected to come from Capesize earnings, which is set to be at USD 12,700/day in January, representing a 36% decline from October’s average.

Further compounding a weaker market in January, MSI forecasts an annualised fleet growth of 2.5% over the next three months. This relatively strong growth mainly comes from the large increase in deliveries that it expects in January.

“However the better news for the market is that deliveries are expected to slow thereafter, particularly for the 10,000-65,000 dwt segment for which the orderbook currently represents just 5% of the fleet,” adds Tooth.

“Slower deliveries and a seasonal uptick in demand will support rates in Q2 next year and we forecast an increase in April by on average 23% from January’s lows.”

Recent freight rate developments broadly match historical trends, with Capesize October earnings 147% of the annual average for the past five years and January spot earnings 87% of the annual average historically.