The decline in dry bulk freight rates may have caught many by surprise. We look at some of the reasons why the market may have softened in recent months across several vessel sizes.

Trade volumes still healthy

The Baltic Dry Index has declined by 38.9% MoM to 1,320 in its latest print, the lowest level since 27th January of this year. This comes despite the volumes moved by bulk carriers remaining at healthy levels in recent months, making it more difficult to pinpoint why exactly rates have declined to this extent. In July, 420 MMT of bulk commodities were loaded on bulk carriers, rising by 1.7% YoY. This would indicate the market is in a better place than what current freight rates would suggest.

On the Capesizes, 166 MMT of cargo was loaded in July, coming in flat YoY. Improvements can also be seen on the Panamaxes, which saw liftings increase by 6.8% in July on increases in grain shipments. Meanwhile, shipments on the geared vessels were flat YoY. As a result, it appears some of the underlying inefficiencies that did so well in supporting the market in 2021, which are now unravelling, have partially driven the weakness in freight rates.

Congestion unwinds

In 2021, congestion levels in several regions, namely China, were crucial in tightening the market. Queues of laden bulk carriers reached as high as 61.5 MDWT in September 2021, 6.8% of the fleet. In most cases, the cause was Covid-19 restrictions, which have of course been loosened significantly in 2022 across the world. These not only affected loading/discharging waiting times, but also lengthened parts of the voyage like crew changes, which would restart the 14-day timer on vessel arrivals to some countries, such as Australia.

As of today, queues currently lie at 38.5 MDWT for the fleet, a 37.5% decline from the highs last year and 18.4% below the 5-year average. Most notably, in China laden vessel congestion now amounts to just 11.8 MDWT, a decline of 59.6% YoY. We do not expect to see queues reach the highs of the previous couple of years as pandemic restrictions continue to ease. As a result, bulk carrier congestion will not play as prominent a role in supporting the market going forward as it did in prior years, particularly since the pandemic began.

C5 voyage efficiency

The Capesize C5 iron ore route from West Australia to China (Port Hedland—Qingdao specifically) is the single largest route in terms of tonnes moved. Up to and including July, Chinese iron ore imports from Australia on the Capes have totaled 445 MMT this year, increasing by 8.2% YoY. In 2021, laden legs on the C5 started rising as congestion in China continued to climb, but the ballast legs also made a significant rise due to prolonged crew changes and the minimum ballast requirement in West Australia.

However, compared to previous analysis, we can see the C5 voyage components have come down off their most recent highs as the inefficiencies have eased. Since the start of the year, the average laden leg has declined by an estimated 4.5 days on this route. This can almost all be attributed to a reduction in time waiting to discharge in China, which has declined by 4 days since the start of the year. At the same time, average load waiting times are at their lowest since Q4 2019 in west Australia, falling approximately 2 days from their most recent highs to 3.8 days. With the average voyage length between Port Hedland – Qingdao about 12 days, we can see the effect the removal of the 14-day quarantine requirement from last port call in Western Australia has had on these shipments.

Chinese demand impacts geared vessels

While all vessel sizes have been somewhat affected by the slowing down in Chinese demand, imports on the geared vessels have declined by 21.4% YoY to 76.1 MMT in Q2. While imports on the Panamaxes only declined by 11.4% YoY and imports on the Capes improved by 2.6% YoY. So far in Q3, shipments to China on the smaller sizes have continued this trend, with imports totaling 25.9 MMT in July, declining by 18.8% YoY. Not only have volumes fallen off in 2022, but so have laden voyage lengths into China. Laden geared vessels are now travelling approximately a week less before arriving into Chinese ports as shipments from India, Vietnam and Australia have all declined.

As we have previously discussed, the effects of the slowing property market have been apparent across most dry bulk commodities. Chinese cement imports on the geared vessels totaled just 393k tons in July, the lowest level since March 2018, with most of these volumes shipped from Vietnam. When including the larger ships, this is still the case. Chinese iron ore imports on the smaller ships averaged 2.4 MMT per month in 2021, with this figure falling to just 612k tons so far in 2022. Almost of all these volumes were arriving from India.  From further afield, shipments from South America have declined by 26.8% in July to just 2.3 MMT.

Last month, volumes from Southeast Asia accounted for 48.3% of cargoes arriving to China on the smaller sizes, compared to 42.4% in July 2021 and the highest level so far this year. If this trend continues and the share of Chinese imports on the smaller sizes from nearby Southeast Asia is maintained, we can expect laden voyage lengths, and thus employment, to remain lower for these vessels going forward.