Although Cleaves Securities has had to lower target prices across all dry bulk stocks because of a weaker demand outlook, it sees upside potential mainly due to limited growth in supply. “Although the demand side of the equation has contracted due mainly to weakened Chinese demand, the supply side dynamics are looking extremely favorable going forward,” the Oslo-based investment bank said in a report. It thus has a buy rating on the segment. Top picks are US-based Genco Shipping & Trading, along with Norway’s 2020 Bulkers and Himalaya Shipping, with upside potential ranging between 92%-103% on the target prices.

Cleaves expects market conditions to improve following a softer rates period in recent weeks as Brazil’s increase in exports of iron ore will drive up fleet utilization. It forecasts dry bulk trade to fall by 0.5% this year, measured in tonnes, but because of the war in Ukraine creating a shift in trade patterns, it envisages tonne-miles to grow by 0.9% versus 2021. Iron ore has dropped by 1.3% so far in 2022, but is expected to rebound next year, with growth of 3.4%, while coal is estimated to see growth of 1.3% in 2023 from a drop of 0.3% this year compared with the same time last year. While grains are forecast to rise by 4.6% in 2023 after a contraction of 3.2% in 2022, minor bulks could have further growth of 2.2% next year from a gain of 0.6%. Overall, dry bulk tonne-mile demand growth is expected at 2.9% next year.

Despite weak demand in China, owing to coronavirus-related lockdowns curbing industrial output along with a slowing real estate sector, Cleaves is not modelling a recession, but rather a normalization of activity. As China’s steel output has lagged last year’s numbers, steel mills have substituted high-iron content ore from Brazil and South Africa with lower quality domestic product to keep profitable, according to Cleaves. Thus, key commodity imports have dropped, resulting in an unwinding of congestion at ports, it said.

The orderbook-to-fleet ratio is meanwhile at the lowest level on record, and 62% of the fleet will be 10 years or older by the end of 2023, Cleaves estimates show.

Meanwhile, shipyards are full until about 2025 and the new efficiency regulations will lead to higher scrapping from 2023. Cleaves also expects the hierarchy between vessel sizes to normalize with capesize demand increasing through the current cycle. That supports a 73% rise in its dry bulk share index. But asset prices are expected to see a downward correction in the near-term given the weak freight rate environment.