Bulker spot rates hit some of the highest levels in around 13 years this year as pent-up demand unwound, following the depressed markets of mid-2020. Discussion in early 2021 focused on whether we could be starting a commodities “super-cycle” as nations around the world — notably China, a major importer of dry commodities — announced stimulus packages.

The question for exporters was: can you get a ship? In addition to high demand, bulkers have been stuck for long periods in port congestion, quarantine or while waiting to change crews. Enquiry sprang from surprising places in 2021, especially as commodity prices rocketed. This was the year we saw logs loaded on capesizes and smaller bulkers being retrofitted to be able to carry containers. Markets decoupled as the year went on. Rather than capesize utilization filtering down and helping the smaller segments, this year handysizes led the charge, buoyed by breakbulk cargoes that would have otherwise been containerized.

But 2021 was not without its shocks and surprises. Just as rumors of $100,000-per-day capesize fixtures were hitting the market in September, the Chinese government intervened to cool down raw material prices. Sentiment in dry freight markets took a big hit as China’s steel production plunged and property developer Evergrande suffered a debt crisis. But 2021 overall has been an incredible year for bulker owners. For proof, just look at what they did with their cash. Star Bulk Carriers, for instance, began the year with a $219m war chest that it said it wanted to keep on hand in what it perceived to be a riskier commercial environment. It need not have worried. The shipowner has used its cash to pay out the highest shareholder dividends of its peer group and most other public bulker firms have kick-started distributions too.

But despite the upturn, bulker stocks continued to trade at below net asset value during 2021, showing there is still some disconnect in the underlying strength of the business and the interest shown by investors. Bulker owners have also plundered their cash reserves to buy vessels — the canniest buyers acquired their ships early in the year before asset prices jumped up.

Some forward-thinking firms have even invested in technology and decarbonization initiatives. But spending in the dry cargo sector has not been limited to ships, shareholders, and special projects. Sources have heralded “The Return of The Long Lunch” — many of which have extended past dinner time — recalling the good old days of hot markets and high spirits. And then, of course, this year’s performance-related bonuses should be a nice Christmas present too.

The Grinch returned to the dry bulk market on Wednesday and the Baltic Dry Index plunged to a low not seen since April. The drop came on the back of declines in spot rates for bulkers large and small ahead of the Christmas holiday, though midsize ships were spared. The BDI fell 2.8% in one day to reach 2,229, a 19.6% drop since this time last week and the lowest level in more than eight months.

The day’s plunge came as handysize, supramaxes and capesize bulkers all saw their spot indices turn red, while in the middle panamaxes posted Wednesday’s only gains. The BDI component posting the biggest losses was the capesize spot market, where rates plummeted to levels not seen since June. The Baltic Exchange’s 5TC, a measure of spot rates across key routes in the capesize sector, plunged to $20,363 per day, a one-day drop of 7.8%. The rate marked a 25% drop compared to the same time of the prior week, and it was the lowest level in five months. But the Baltic Exchange noted in its daily report that the 5TC rate was $4,894 lower this time last year.

Analysts at the exchange said it was a busy day for the capesize market as owners looked to lock in vessels before the holiday break. The days’ chartering included rumors that Rio Tinto booked a capesize at $9 per tonne to move iron ore from Dampier, Western Australia, to China’s port of Qindao, a day after the miner paid $9.35 for a similar voyage, according to Baltic Exchange data. In the Atlantic market, Rio Tinto reportedly hired an NYK Line vessel on Tuesday to move 170,000 tonnes of iron ore from Quebec in Canada to Japan. The miner, who ships Canadian iron ore from Sept-Iles, is paying $28.50 per tonne to go around the Cape of Good Hope in a deal that includes $30,000 for demurrage. It will pay $1 per tonne less for a Suez Canal journey. That’s down from $35 per tonne for a similar Cape voyage in a fixture booked a week earlier on the route.

Panamaxes rates headed in the opposite direction, with the panamax 5TC index adding 3.1% to hit $21,460 per day. But Wednesday’s jump was a bounce from a one-month low a day before and marked a 13.1% slump from a week earlier. Baltic Exchange analysts had seen signs of life in the segment on Tuesday. “The pockets of optimism in some parts turned into much-needed fruition for owners today with firmer bids and ultimately fixtures emanating in both basins for the longer round trips,” they wrote in their Wednesday report. Panamax owners held their ground on rates in the Atlantic, forcing charterers to pay higher rates to lock in tonnage before Christmas. Canadian grain player Viterra fixed Castor Maritime’s 76,619-dwt Magic Horizon (built 2010) for a roundtrip voyage from Asia to the east coast of South America at $20,000 per day. The last-done fixture on the route was on Friday when Cargill agreed to pay $18,250 per day for a similar deal. Higher activity in Asia also lifted rates. Korea Electric Power Co (Kepco) locked in a kamsarmax to move 80,000 tonnes of coal from Queensland, Australia, to South Korea at $16.89 per tonne. A day earlier, the utility signed up to pay $16.05 per tonne to ship 75,000 tonnes on a Pan Ocean ship at the same rate.

“On the back of a seemingly improving physical and FFA market period interest came to the fore again,” Baltic Exchange analysts said, referring to forward freight agreements. Up to three kamsarmaxes were locked into period deals on Wednesday. France’s Louis Dreyfus Commodities grabbed South Ocean Marine’s 81,200-dwt Xin Han (built 2013) for eight to 10 months. Another commodities giant, Bunge, chartered Haibao Shipping’s 81,200-dwt Wen De (built 2013) for five to seven months at $22,500 per day, the Baltic Exchange said. A Greek-owned kamsarmax is also believed to have been chartered in the third period deal at $24,000 per day, but few details of the deal were available. The trio were the first fixed-rate period charters for panamaxes and kamsarmaxes in a week.

Slowing property and infrastructure markets in China will likely remain lackluster next year, an industry conference was told. The prospects cast a shadow over the country’s steel production which underpins its iron ore imports, a key source of demand for global dry bulker shipping. Tang Jinwei, an economist at Bank of Communications, estimated the annual growth rate of investment in property development in China would fall to 1.5% in 2022 from 5.3% in 2021 and 7% the previous year. “Strict control policies, especially those targeting developers’ financing levels, have made them less capable and enthusiastic about acquiring lands,” Mr Tang told a dry bulker seminar organized by China Shipowners’ Association.

Beijing in August last year introduced the so-called “three red lines” requirements to de-leverage the domestic property developers it deemed as highly indebted, as part of regulatory efforts to de-inflate the housing market bubble in the country. The moves, however, have led to a liquidity crunch facing large developers, highlighted by China Evergrande’s debt defaults this year, and a severe slowdown in China’s real estate market. Investment in the sector has substantially waned since the third quarter, with negative growth year-on-year seen over several months, said Mr Tang. He expected the weak trend to continue in the short term, despite policy makers’ gesture of goodwill, including easing rules on presales, subsidies, and mortgages. “This year’s delay in land sales will constrain the available land for development and construction next year when the newly started housing area may shrink.”

Chen Jingfu, an analyst at Shanghai Ganglian, a steel industry intelligence firm, echoed the view, saying the policy correction is useful to curb the contraction but unlikely to give the sector a significant boost. Moreover, a sluggish property market meant that local governments were struggling to invest in infrastructure projects, as selling land makes up most of their income, he added. Beijing has already expedited the issuance of local government bonds to perk up the investment and called on local officials to frontload spending on infrastructure projects during a recent top-level meeting that outlines the country’s economic agenda for 2022. But the steel industry has not yet felt the increase of construction projects. The reason might be there were limited projects that could match the funds to be deployed, said Mr Chen.

He expected both steel demand and supply to continue softening in China next year. Chinese steel output already fell 22% year on year in November to 69.3 MMT, while the 11-month accumulated volume dipped 2.6% to 946.4 MMT, the latest data from the World Steel Association shows. Mr Tang from Bank of Communications forecast the policy support will push the country’s infrastructure investment growth to 5% in 2022 from less than 1% in 2021. But a further expansion would be a tall order as the size of traditional infrastructure projects such as roads and rails was already massive and near saturation in China, he added.

Buildings and infrastructure facilities account for about 56% of the country’s crude steel consumption, according to estimates from Shanghai International Shipping Institute, a state-owned think tank. Its chief analyst Zhang Yongfeng said that the decline of China’s imports of iron ore, the main raw materials for producing steels, accelerated in recent months amid a weaker steel market. The world’s largest importer of the commodity saw the volume for the first 10 months drop 4.2% from the same period in 2020, with October seeing a slump of 14.2%. “When the steel market is weak, Chinese mills also tend to use more iron ores produced domestically rather than overseas, which could further slow the imports,” Mr Zhang said.

Maritime Strategies International recently took a bearish stance on the prospects for the dry bulk market into next year. Market dynamics had shifted to negative over the past few months, driven by weakness in China’s steel industry, the London-based consultancy said in a monthly review. That is the biggest concern for the bulker markets in 2022.

Maritime Strategies International is bearish on the prospects for the dry bulk market looking ahead into next year. Market dynamics have shifted to negative over the past few months, driven by weakness in China’s steel industry, the London-based consultancy said in a monthly review. That is the biggest concern for the bulker markets in 2022.

Iron ore trade has not yet been affected by the downturn in steel output due to stockpiling efforts as prices dropped by half to $100 per tonne, it said. Inventories are at multi-year highs of more than 155m tonnes. While steel production cuts have been attributed to improving air quality ahead of the winter Olympics in Beijing in February, as was the case with the summer games in 2008, the dynamics are very different this time round, it added.

First, the sharp drop in steel output in China has occurred far ahead of the event and at a time of “severe pressure” on the country’s property sector. In 2008, there was a massive stimulus package amid the global credit crisis. Second, China is looking to limit 2022 steel production to this year’s level, which is heading for a five-year low. Congestion, which had added positivity to the market this year, is meanwhile expected to continue to unwind, MSI said, adding that there will be volatility given periods of weak demand.  While the above will be more acute for the capesize market, other segments will not be immune to the downturn, MSI said.

Based on its expectations on congestion and trade, MSI forecasts the demand for bulkers in deadweight tonne terms to remain flat next year versus 2021. “Bearing this in mind, an orderbook equivalent to 7% of the fleet starts to look much larger than many analysts like to point out,” MSI said, adding that the orderbook is front-loaded. It expects about 29m dwt to be delivered next year. In a year of no growth in demand, this is negative for earnings.”

Chinese demand for iron ore and metallurgical coal, which contracted this year as steel production slumped on the weakening residential property market, is expected to return to growth next year, according to Australia’s resources government forecaster. The slowdown in the residential property market in China, the world’s largest producer, consumer, and exporter of steel, “remains a key risk to growth prospects and steel demand”, according to Australia’s quarterly Resources and Energy publication. The Department of Industry, Science, Energy and Resources quarterly report was released on December 19.

Australia’s exports of iron ore are estimated to increase by 5.5% in 2022 and 2.8% in 2023, its government forecaster said. Iron ore and coal are used in steelmaking with around 1,400 kg of iron ore and 800 kg of coal needed to produce one tonne of steel. Some 72% of Australia’s iron ore is shipped to China, leaving export volumes exposed to the country’s property slump and steel consumption headwinds that have accelerated in the past three months. Australia is the world’s largest iron ore exporter and second-largest coal exporter after Indonesia, with volumes a key generator of demand for capesize and panamax bulk carriers in the Pacific region. Global trade in iron ore shrank 2.8% this year to 1.65bn tonnes, led by a 3.4% contraction in imports from China, which takes 71% of all volumes, according to the report.

“China’s efforts to address surging property prices and high debt in its residential property sector also appear to be taking effect and is expected to lead to lower construction activity going into 2022,” the report said. “With the property construction sector, a major end-user of steel (around 30% of China’s total demand), continued weakness in this sector has significant implications for iron ore demand over the outlook. However, China’s efforts to de-leverage its residential property sector and remove fiscal stimulus are likely to face growing challenges moving into 2022. This follows weaker economic activity and renewed outbreaks of the Covid-19 pandemic in recent months.”

Power shortages and electricity rationing have also weighed on manufacturing in China in the final half of 2021. It was unlikely that China’s construction activity would return to the levels seen in the first half of 2021, the report said. It was this supercharged steel-making and raw materials demand in early 2021 that lifted dry bulk rates to 13-year highs, before rates dropped off sharply on the back of falling production in China.

Australia’s iron ore export volumes gained 0.8% year on year to 874m tonnes, and will rise a further 49m tonnes in 2022, according to the report. China’s imports are forecast to gain 2.7% in 2022, to 1.16bn tonnes. World steel production is estimated to reach 1.95bn tonnes in 2021, up some 4% from 2020, the report said. The Australian government agency forecasts global steel production will rise 2.8% in 2022, topping 2bn tonnes for the first time. There will be a further 2.6% gain in 2023, according to the report.

Last year saw double-digit, or near double-digit, growth for major steel producers including the US, European Union, India and Japan, even as Chinese production and consumption slumped by 1% and 0.6% respectively. China makes up around 55% of global production, the report said. Initially, steel output and economic activity was slower to rebound from the pandemic disruptions of 2020 for producers outside of China. However, “the recovery in many advanced economies remains well underway as 2021 ends”, according to the report. Steel production in the EU — the second-largest steel-producing economy — grew by 9.3% year on year for 2021, spurring a 24% increase in iron ore imports. This was also 2% higher than the same period in 2019. Imports will be flat in 2022 and 2023.

About 7.7m fewer vehicles were produced in 2021, according to the Resources and Energy publication because of global supply chain disruptions and the current shortage of global semiconductor chips. With chip shortages expected to persist well into 2022, this has significant implications for global steel markets, the report added. Australian exports of metallurgical coal used in steelmaking are expected to recover from this year’s 0.9% contraction, with a year-on-year rise of 5.3% to reach 179m tonnes. Overall world trade in metallurgical coal is expected to rise 4.4% in 2022 and another 2.8% in 2023. Chinese imports were down 24% this year at 55m tonnes but are expected to gain 10m tonnes over the next two years.

Despite climate change pressures, world trade in thermal coal is seen posting year-on-year gains in 2022 before contracting in 2023. India will increase imports by 8.3% in 2022, to 164m tonnes, while Japan, China, South Korea, and Taiwan are all expected to reduce shipments.

Projected growth in overall coal use is set to hit record highs over the next two years, due to rapid economic recovery, according to the International Energy Agency.

“With electricity demand outpacing low-carbon supply, and with steeply rising natural gas prices, global coal power generation is on course to increase by 9% in 2021 to 10,350 terawatt-hours, a new all-time high,” the Paris-based agency said in its annual market report. However, coal’s share of the global power mix is expected to be at 36%, it said. That is five percentage points below its 2007 peak.

In the US and the European Union, coal power generation is forecast to increase by almost 20% this year but will not reach 2019 levels. By contrast, estimated growth of 12% in India and 9% in China will push coal power generation to record levels. While the increased coal use will derail net zero targets, it will likely provide a boon to the dry bulk market, which has already benefited from a distortion in coal trades this year, partly due to China’s unofficial ban on Australian product as political tensions rose.

Spot dry bulk rates across all segments rose to multi-year highs in 2021, mostly due to a surge in minor bulk trades, but also due to the reshaping of coal trades, with longer sailing distances keeping bulkers tied up for longer. In January to November, global coal exports reached 1.08 BMT, a 5% increase over the same period in 2020, according to Banchero Costa. Australia shipped 31% of the volume, followed by Indonesia at 28%, Russia at 15% and the US with 7%, it said. The biggest increase came from Russia, which grew by 8%, followed by Indonesia at 5% and Australia with 1.7%.

In 2020, global coal demand fell by 4.4%, the largest decline in decades, but much smaller than the annual drop that was initially expected at the height of the lockdowns early in the pandemic, with large regional disparities, the IEA said. Coal demand grew by 1% in 2020 in China, where the economy began recovering much earlier than elsewhere, whereas it dropped by almost 20% in the US and the EU, and by 8% in India and South Africa. Beyond power generation, coal demand for cement and steel production is forecast to grow by 6% this year, below records seen in 2013 and 2014, according to the IEA. “But depending on weather patterns and economic growth, overall coal demand could reach new all-time highs as soon as 2022 and remain at that level for the following two years,” it said. “The pledges to reach net zero emissions made by many countries, including China and India, should have very strong implications for coal — but these are not yet visible in our near-term forecast,” said the IEA’s director of energy markets and security Keisuke Sadamori. “Asia dominates the global coal market, with China and India accounting for two thirds of overall demand. These two economies — dependent on coal and with a combined population of almost 3bn people — hold the key to future coal demand.”

A beleaguered US coal market surpassed 61 MMT in total exports as of October, expanding by over 14 MMT (+30%) y-o-y, and making up much of the ground lost in 2020. Thermal exports grew from only 18.4 MMT in 2020 to 29.3 MMT in 2021 (+10.9 MMT y-o-y), with India’s 9.6 MMT accounting for nearly one-third of total thermal shipments and over 3.6mt of total thermal growth. Along with India, US thermal exports to the East Asian majors rose by 2.7 MMT y-o-y to 7.9 MMT, leading fronthaul thermal shipments to double this year. USEC and USG thermal coal shipments to the Indian Ocean and Pacific reached 12.6 MMT, comprising a record 43% of total exports and 58% of total export growth.

Met coal exports, at 31.7 MMT in the first ten months, saw a gain of only 3.2 MMT (+11%) y-o-y. However, the Chinese government, sensibly or otherwise, imposed import policies that severely restricted its access to foreign met coal. Wide-spread closures along its Mongolian land border exacerbated the self-imposed supply shortage caused by its wholesale ban on Australian coal imports. Consequently, US met coal exports to China grew from only 0.6 MMT in the first ten months of 2020 to almost 9 MMT in 2021, more than making up for the 5 MMT decline in exports to the rest of the world. This trade shift toward China resulted in a 6.3 MMT increase in a fronthaul met coal shipments.

As of October, total US fronthaul coal shipments expanded by over 12.6 MMT to 27.6 MMT (+84% y-o-y), dwarfing the +1.5 MMT (+5% y-o-y) growth figure for intra-basin shipments, and contributing to an outsized tonne::mile effect in what is traditionally an intra-basin trade. However, as the USEC comprised the bulk of the increase in cargoes, its larger port infrastructures allowed Capesizes to capture most of the export gain. Capesize vessels shipped only 17 MMT of US coal in 2021 (28% share) but accounted for over 10 MMT(72%) of the total increase in exports and an even higher proportion of the fronthaul business.

China’s January-November steel output remains down on the year, but figures are set to rebound every month after steel makers completed 2021 output cut requirements. Steel production is set to increases in December and beyond and see improvement in margins as expectations that additional monetary easing and supportive property and infrastructure policies will take effect next year. Jan-Nov saw crude steel output reach 946.4 MMT, down 2.6% on the year. Pig iron output fell 4.2% y/y to 796.2 MMT.

China steel production cap in 2022 is set to be the at the same level as 2021’s but steelmakers have pushed for boosts in output for December in efforts to raise the output quotas for 2022, according to some market sources. China’s crude steel output in Q1 of 2022 is set to be close but not exceed the level of 3 MMT/day as seen in Q1 2021, but Q1 output in 2022 is likely to be much higher than November’s level in 2021.

Healthy profit margins have also been driving the increase in steel production. China’s domestic hot-rolled coil and rebar sales profit margins were USD 106/ton and USD 116/ton on December 14. Future prices hinge on China’s property and infrastructure markets. Infrastructure fixed asset investments fell 4% on the year, while new property projects fell 21% on the year in November.

Giant Greek shipowner Star Bulk Carriers is betting on a continued bulker “upcycle” due to the lack of newbuilding orders. US investment bank Jefferies said the New York-listed company’s executives revealed during client meetings that the current boom is different from the one 20 years  go spurred by China joining the World Trade Organization and vessel undersupply. Star Bulk bosses said the next cycle should be driven by a lack of new vessel ordering due to regulatory uncertainty and rising newbuilding costs. Additionally, shipyard consolidation and closures over the past few years have resulted in less available shipbuilding capacity, much of which is booked up by container vessels, they said.

The bulker orderbook has remained at about 7% of the existing fleet during 2021, and has trended lower towards the end of the year. Management believes ordering will remain under pressure, as there is no clear market solution to achieve zero or ultra-low emissions, especially for the smaller assets. Finally, the implementation of efficiency regulations from 2023 should also result in less effective capacity as older, less efficient vessels are forced to slow-steam or exit the market via scrapping.

Star Bulk also told Jefferies that the owner’s commitment to dividends remains firm, and it will seek to minimize spending cash in order to maximize handouts to shareholders. The shipowner could also look to make additional share repurchases, but only if it sells a few older vessels. With shares trading at a steep 35% discount to net asset value, a higher dividend expected in the fourth quarter and attractive supply/demand fundamentals, Jefferies has a “buy” rating on the stock. Analysts led by Randy Giveans said: “We remain constructive on a rate recovery in the dry bulk shipping market in Q2 2022 and beyond due to firm GDP growth coupled with low fleet growth.” Jefferies argues that recent volatility in capesize rates has largely been driven by Chinese regulatory policies to limit steel production. Rates will probably remain muted in the seasonally weaker first three months of 2022. But the Chinese government has announced additional stimulus that suggests it is focused on economic stability in the coming months, to offset weakness in the real estate market, Jefferies said. And global economic growth and port congestion are still supporting rates.

The tight container ship market has also resulted in more cargoes, such as bagged rice, being transported on dry bulk vessels instead. Additionally, some open-hatch Handymax are being loaded with containers to return equipment back into the Pacific markets.

Showered with cash like never before, what is it that containership owners know that the rest of us have yet to work out?

Newbuild prices are considerably elevated and most of the ship owning community cannot, hand on heart, say with any conviction that they know what the fuel of the future is. And yet our boxship friends have piled in with more orders for new ships than ever before. Granted many of these new ships are alternatively fueled – for which read LNG bar a handful of Maersk methanol dual-fuelers – but really, we are still so far away from being able to order tomorrow’s ships with any confidence. Where will the green methanol come from? Where will all the green hydrogen come from? Fortunately, the dry cargo owners are sensible and are holding back so we can see a healthy demand-supply relationship in the dry cargo area for a few years ahead.

Shipping is obliged to become green but cannot do it on its own. The world seems to not be joining the dots – demanding zero emissions without establishing the requisite infrastructure. Of course, the regulatory tardiness does not help. I am very worried about EEXI and CII rules coming in. This bodged legislation will not necessarily put us on the green path we need to be on fast. It will, however, make older ships go so slow, potentially great news for owners as rates will rally. It’s not just shipping that has struggled to keep a resolute green path in 2021. The global energy transition has stalled this year – witness the extraordinary growth in coal use this year, in no small part due to high gas prices.

One final point relating to finance. You might have read recently about the big drop in syndicated marine loans this year. While this is a clear trend, don’t think for a moment that this translates into the finance taps being turned off for shipowners. There is still a massive inflow of capital from every other source. Whatever project you look at these days, four or five bids come from non-banking sources. Shipping is attractive again and there will not be a lack of funding anytime soon.