The Baltic Dry Index — the barometer for dry bulk shipping markets — has been continuously marching forward in recent weeks, supported by strong commodity demand and inflation. Shipowners are in the driving seat, enjoying the best times for dry bulk shipping market in more than a decade as the idea of the rise being just a temporary spike fades.

What has led to this growth? As the price of iron ore breaches $226 per tonne, shippers in Western Australia are trying to maximise their sales, with healthy steel margins in China supporting demand, according to Braemar ACM. Brazilian iron ore exports have also continued to experience consistent year-on-year strength — a development not seen since 2018. Yet it is not difficult to see the scarcity factor in the commodities world.

Prices for iron ore, grains, steel, lumber, cement, glass, copper, aluminium, palladium and dozens of other smaller commodities moved by dry bulk ships are up substantially since the beginning of the year. The surge in demand for commodities, says Breakwave Advisors, is causing shortages, which eventually will normalise as production catches up to demand.

So how high can rates go? “As that production ramps up, we expect demand for dry bulk ships could be up 5% this year and continue next year,” Stifel research said in a recent report. “The dry bulk market is nowhere close to a theoretical ceiling and could easily quadruple from current levels without destroying demand,” it said.

If demand exceeds supply, the primary upward constraint of ship freight cost is the point at which it absorbs the profit of the producer or shipper. For dry bulk freight, the fact that the underlying commodities prices have increased considerably, the implied cost of freight has actually remained low despite the recent increases.

Taking thermal coal as example, Stifel notes that the landed price of coal in China is about $125 per tonne whereas the producer break-even vessels are generally around $60 a tonne. Thus, transportation cost could be as much as $65 per tonne before either price would have to rise or trade would be prohibitively expensive.

Even after the recent surge in freight rates, the cost of transportation is about $13 per tonne on a capesize vessel which earns around $40,000 a day for an average coal cargo. Freight rates would need to rise to more than seven times or around $300,000 per day before the economics are completely destroyed by freight costs, Stifel estimates.

With orderbook to fleet ratio at 5.6% — the lowest it has been since early 2002 and in the absence of a significant reversal in commodity demand, the need for dry bulk shipping is going to outstrip supply resulting in higher day rates, Stifel said.

“We expect demand to exceed supply by about 2% in 2021 and 2022 with limited supply growth in 2023.”