* Capesize earnings at over 10-month high
* Fleet growth adding to market headwinds
By Jonathan Saul
LONDON, Oct 12 (Reuters) - The Baltic Exchange's main sea freight index , which tracks rates to ship dry commodities, rose to its highest in over ten months on Wednesday helped by buoyant cargo demand.
Brokers said growing vessel supply, which was outpacing commodity demand, was set to cap dry bulk freight rate gains in the coming months with economic uncertainty adding to headwinds.
The overall index rose 21 points or 1.0 percent to 2,127 points in a sixth straight session of gains and was at its highest since Dec. 8, 2010. Prior to the move higher last week, it had fallen for six previous sessions.
Broker Fearnleys said cargo fixtures by big mining groups had helped drive upside momentum on the capepsize market.
"The (capesize) index has kept pace with the market and has risen over 14 percent for the week to 3,486 (points)," Fearnleys said on Wednesday.
The recent dry freight market rally had been driven by firmer coal and iron exports from Australia and Brazil to China, which boosted the larger capesize market. Coal imports into Japan have also picked up.
Manufacturing in Australia had been disrupted earlier this year by floods, while Japanese industrial raw materials import demand had been affected by an earthquake which crippled a nuclear plant and threw its economy into disarray.
In August, the overall index, which gauges the cost of shipping commodities including iron ore, coal and grain, dropped to its lowest in more than three months after falling for 18 consecutive sessions. It has remained erratic and is still over 20 percent down from the same period last year.
"While recent trends supporting dry bulk rates remain in place, we continue to believe dry bulk rates will remain volatile over the near-to-intermediate-term, with our rate bias remaining to the downside particularly at current levels," Wells Fargo Securities said in a report.
"That said, should rates remain at relatively firm levels over the next few weeks, we believe we could see upward earnings revisions for Q4 across the sector."
The Baltic's capesize index rose 0.35 percent on Wednesday, with average daily earnings reaching $30,606 a day, and at their highest since the end of November last year.
Capesizes typically haul 150,000 tonne cargoes such as iron ore and coal.
The Baltic's panamax index rose 2.22 percent. Average daily earnings for panamaxes, which usually transport 60,000-70,000 tonne cargoes of coal or grains, reached $16,237 and at its highest since the end of March. Brokers said U.S. wheat exports and coal sales to Asia were bolstering rates in both Atlantic and Pacific markets.
Worries over the health of the world economy have signalled more pain in the coming months for dry bulk ship owners, who face a glut of new vessels ordered when times were good.
"Seasonal demand strength may lead to volatile rates but on average, MSI expects earnings will be lower, primarily as a result of the cumulative strong fleet growth we have witnessed over the past two years," consultants MSI said in a report.
"It will take some time for cargo volumes to soak up excess capacity." (Editing by Keiron Henderson)