The new coronavirus variant appears to have given a boost to share value of container shipping companies, underlying concerns about further supply chain disruptions. The expectation is that the Omicron strain will add pressure to the already clogged up global logistics system and lead to rush of orders from shippers to avoid more congestions, both of which will help harden ocean freight rates.

Among the global top 10 carriers by fleet size, seven are publicly listed. Their shares have traded higher by between over 4% to nearly 18% since November 26. The variant was first identified in South Africa at the end of November. Leading the valuation charge is Shanghai and Hong Kong-listed Cosco Shipping Holdings, followed by the three Taiwanese firms that have all seen double-digit rises.

One perception from the local analyst community is that China’s exports could potentially benefit from the emergence of the new variant, which is expected to strike a bigger blow to other Asian manufacturing nations owing to their relatively low vaccination rate and loose virus-control measures. “If that happens, we’ll see more orders flow back to China and be shipped from China,” said a Shanghai-based equity analyst. “With the extended logistics chaos, Cosco as a China-based carrier will likely see their earnings surge further.”

Analysis by Alphaliner estimates the 10 largest carriers, including Cosco, would altogether earn $115bn-$120bn in operating profits for 2021, based on forecasts of the companies and its own. “The recent emergence of the Omicron variant could ultimately push these forecasts even higher,” said the consultancy. “The ‘tail’ on the container boom has continually defied forecasts with several players initially predicting that the boom would peter out after the 2021 Chinese New Year,”

While further studies are required, preliminary evidence shows that Omicron is more transmissible than the previous variants and may be resistant to existing vaccines. If proved, from a shipping perspective, this is also seen as a risk that could reignite port closures in China because of the country’s “zero-Covid” policy, the shift of consumption from services to products and the global crew-change crisis. All of these had pushed up freight rates to their previous apogees. “The [Omicron] impact is neutral or positive as previous outbreaks have only extended the stay-home spending spree and exacerbated the bottlenecks,” said Liner Research Services analyst Hua Joo Tan. “I don’t see any negatives.”

There are, however, negative aspects. In addition to prolonging supply chain disruptions, concerns have been raised that Omicron, if taking a more sever turn, could give rise to a repetition of what had happened during the earlier phase of the pandemic, when lockdown measures dampened demand for goods and services. “One is where it creates more supply disruptions and prolongs higher inflation for longer,” said OECD chief economist Laurence Boone. “And one where it is more severe and we have to use more mobility restrictions, in which case demand could decline and inflation could actually recede much faster than what we have here. That could be a scenario where we need more fiscal support at this stage.”

Mr Tan believed that the governments would continue to subsidize consumers should the current economic recovery stall, hence bolster cargo demand. “The politicians have to spend their way out of this mess. What choice do they have?”

A very tight vessel supply should keep the dry bulk sector afloat over the next few years despite lower demand for iron ore from China, according to market experts. The country is expected to lower imports of the commodity as it looks to curb steel output in an effort to cut carbon emissions while facing a weak real estate market.

“Recently we’ve had some of the biggest declines ever in terms of the output that is produced in China,” Braemar ACM Shipbroking lead dry cargo analyst Nick Ristic said during a Breakwave Advisors webinar. China produced 71.6 MMT of steel in October, down 23% from a year ago, according to the China Bureau of Statistics. 2021 production through October totaled 87.7 MMT, down 0.7% for the same period last year. “There are signs that the demand picture in China in the last few weeks hasn’t been very positive,” Ristic said.

This may mean less demand for capesize bulkers while smaller ships stay busy moving grains and steel, but dry bulk’s extremely low supply should keep rates elevated, he said. “The thing we think is going to pick up that kind of supercycle moving average for the next few years is that limited new ship supply where we just have so few ships on order,” he said. “As a percentage of the size of the trading fleet today, we’re looking at only 7.5% on the orderbooks … all the way out to 2023-2024,” he said. “That figure is virtually locked in right out to the second half of 2024 potentially even 2025 if you’re looking at ordering a new ship.”

Vessel supply will in effect fall by 65 ships when slow steaming starts in 2023 to meet the IMO’s Energy Efficiency Design Index for existing ships (EEXI), he said. Heightened demand for thermal coal in Europe, China’s ban on Australian coal and Guinea’s export of 65 MMT of bauxite to China this year should also benefit rates, he said.

Average spot rates for capesizes may not reach as high as the $87,000 per day they hit in October, but 2022 should still be a strong year for the dry bulk market, said Peter Lindstrom, Torvald Klaveness’ head of research and the company’s data platform. “We’re still in the midst of a pandemic.” he said on a panel whose title asked, “Is the dry bulk upcycle still intact?”.

China will probably pick up iron-ore demand, however, as its real estate market improves next year, he said. “I don’t think Chinese real estate demand or Chinese steel demand, in general, will remain muted as they are today throughout 2022,” he said.

A “distorted” container ship market in which prices have skyrocketed amid unprecedented demand should continue to put further pressure on dry bulk shipping’s tight supply, said Rahul Kapoor, IHS Markit’s global head of commodity analytics and research at maritime and trade.

“They’ve never been so correlated, but in the smaller segments, we’ve seen a number of vessels actually carrying the containerized cargo,” he said during the panel.

Brazilian soybean exports in November almost doubled on the year amid strong demand from China, according to the country’s foreign trade department, or Secex. A higher-than-expected soybean exports from Brazil is likely to support oilseed prices. According to Platts, SOYBEX FOB Santos for January loading was assessed at $497.17/mt on December 1, in comparison with $490.25/mt for SOYBEX FOB New Orleans. The world’s top beans producer and exporter shipped out 2.59 MMT of the oilseed, as of November 30, compared with 1.43 MMT in the same month last year, the Secex report said December 1.

China has been buying a lot of Brazilian beans in recent weeks. In October, China accounted for almost 80% of total Brazilian soybeans shipments, and this trend seems to be continuing in November as well. China turned to Brazilian soybeans as the US beans supply was still recovering from Hurricane Ida, which impacted grain elevators in the gulf region since late August. Hurricane Ida, a Category 4 storm with winds of 150 mph when it made the landfall in Louisiana August 29, had hit grain elevators in New Orleans, a major corridor for US soybean and corn exports, accounting for almost 60% of total US grains exports.

The US soybean export volumes generally soar at the start of harvest during mid-September and continue till February. While the Brazilian oilseed trade spike between January and August every year. According to Secex, Brazil exported 83.4 MMT of soybeans between January and November, up 1% on the year, with 70% shipments headed for China. Brazil is likely to export 85 MMT of beans in the calendar year 2021, steady on the year, the country’s national agricultural supply company Conab said in its monthly report November 11.

The omicron strain of Covid-19, first identified in South Africa last week, is already causing havoc to crew change operations around the world. Travel restrictions have been rushed in at many key hubs over fears that the new variant is more contagious than earlier strains. Singapore, one of the most important crew change hubs in the world, has barred the entry of vessels from Africa while another important Asian hub, Hong Kong, now has 44 countries on a high risk list, meaning ships that have called at these nations 21 days or less to arrival at the Chinese city will not be allowed to carry out crew change.

The omicron concerns come at a time where the crew change crisis had been easing with latest data showing less seafarers have been working onboard vessels beyond the expiry of their contract in recent weeks. “The spread of the new omicron variant could lead to a reversal of these positive trends. It is important that governments treat seafarers as key workers and continue to allow crew changes, when the proper health protocols are respected,” commented Kasper Søgaard, managing director, head of institutional strategy and development at the non-profit organization Global Maritime Forum, which helps tracks crew change numbers.

“The travel restrictions being implemented in response to the omicron variant are nothing short of deeply alarming,” said Rajesh Unni, founder of Singapore shipmanager Synergy. “We are bracing for impact and buckling up our seatbelts. We are expecting longer quarantine period, tighter testing regime and restrictions for vessels coming from South Africa and neighboring countries,” warned Carl Schou, president and CEO of Wilhelmsen Ship Management.

Kishore Rajvanshy, managing director of Fleet Management, one of the world’s top three shipmanagers, revealed some Fleet crewmembers have already become stranded in South Africa due to travel restrictions. “We’re all holding our breath and hoping that this new variant isn’t going to have a long-term effect on circumstances that are already challenging,” Rajvanshy told Splash.

Henrik Jensen, CEO of crew management specialist Danica, said that his company has also already had to cancel a crew change in South Africa as the booked flights for the off-signing crew were cancelled. “We cross our fingers that the countries which are now allowing seafarers through for crew changes will continue to do so and that the availability of international flights will not be affected too much,” Jensen said.

At its peak, the crew change crisis saw more the 400,000 seafarers working beyond their contract limits last year. “Given that we’ve already had a humanitarian crisis at sea in 2020, by now systems should be in place globally to enable smooth crew changes, priority air travel, immediate medical assistance and rapid repatriation,” Synergy’s Unni said, calling once again for global recognition that seafarers are key workers and that they should have access to green channels to enable them to work and return home. Unni also hit out at the “patchwork” of vaccine recognition rules that he argued make very little sense.

More than 50 ships were waiting on Monday to unload at the beleaguered Port of Vancouver, still dealing with the impacts of a major storm two weeks ago and ongoing rain that continues to set back reconstruction efforts in the province of British Columbia. A provincial state of emergency has now been extended to December 14.

Rail and road links from the port to the rest of the country remain an issue, meaning that containers are backing up at the port’s terminals. To help tackle that challenge, the federal government is providing more than C$4m to prepare an undeveloped 40-acre industrial site to temporarily store empty containers.

The federal and provincial governments have established a joint supply chain recovery working group to help prioritize efforts to support supply chain operations, and launched a survey to gather stakeholder input to that process. The governments have asked shippers to exercise restraint in seeking to send non-essential goods into or through B.C.’s Lower Mainland.

Canadian National Railway, one of Canada’s two major rail lines, shut down its service in the region on Monday. “After moving seven trains during the weekend, CN took the decision to proactively close its network as the large amounts of precipitation into British Columbia were causing increased debris, washout and landslide activity,” the company said. The Port of Vancouver noted in an update that “a timeline for restored rail operations through the site is currently unavailable.” In the meantime, CN is sharing the Vancouver-Kamloops line of its competitor, Canadian Pacific Railway.

CN has diverted some rail traffic to the Port of Prince Rupert, further to the north along the Pacific coast. Prince Rupert has not been affected by the recent weather events.

Drivers at two Port of Vancouver trucking companies issued a strike notice this week. However, one of the companies, Aheer Transportation, has now reached a tentative agreement with the drivers. Approximately 120 drivers at Prudential Transportation will begin a strike on Friday if the company does not settle their dispute before then.

Bulk carriers are considered the mainstay of China’s shipbuilding industry. This gave rise to several shipyards in the country in the 2000s and enabled China to become a leading shipbuilding nation. But for the last 10 months, the bulk carrier market has taken a backseat as containerships made up the bulk of newbuildings booked at Chinese shipyards.

According to Clarksons’ China Intelligence report for October, Chinese shipyards secured 682 newbuildings of 18.3m cgt between January and September with 57% of the order volume being boxship newbuildings. Bulk carriers made up just 25% of the orders. The volume of containership orders Chinese shipyards secured has even surpassed those of South Korean yards. This begs the question: are bulker carriers becoming less important to Chinese shipyards? Shipbuilding brokers say a strong demand for containership newbuildings together with attractive shipbuilding prices have led Chinese yards to turn their attention to this ship type. “Given the current high steel-plate costs, constructing a containership brings in better profit margin than building a bulk carrier,” said a broker. “The strong demand for boxships also plays an important role.” Jiangsu-based New Times Shipbuilding, which specializes in building tankers and bulkers, is one such shipyard in China that has turned to containerships. The privately-owned shipbuilder made a return to the boxship segment after an absence of eight years, when Greek owner Chartworld signed up for two 13,000-teu newbuildings.

Stuart Nicoll, director of Maritime Strategies International, said bulkers accounted for one-third of Chinese orders in the last few years, which is a greater proportion than during 2015 and 2016. “Some of this is due to underlying cycles for different ship types, notably containerships. A lack of oil tankers in the recent ordering is also distorting the data,” he said. “However, only a handful of yards have dry bulk carriers as the dominant ship type for orders placed in the last couple of years. Most of the large shipyards now have diversified orderbooks. Although we believe China will remain the leading shipbuilder of dry bulk carriers, this ship type will no longer be the most important sector for the Chinese builders,” said Nicoll. Brokers said Chinese shipyards are diversifying their products portfolio and pivoting towards higher value-added vessels.

Even product tanker shipbuilding specialist Guangzhou Shipyard International entered the niche pure car/truck carrier sector in May, when it struck a deal to build a series of 7,000-ceu LNG dual-fuel newbuildings for John Fredriksen’s SFL Corp. China’s ambition to build high value-added vessels is not new. In the last few years, shipbuilding companies there have made major strides in moving up the newbuilding value chain. Hudong-Zhonghua Shipbuilding has delivered LNG carriers and privately-owned Yangzijiang Shipbuilding has built up its orderbook with some large LNG dual-fueled containerships. China Merchants Heavy Industries delivered the second 200-passenger expedition cruise ship Ocean Explorer (built 2021) to Miami-based owner SunStone in July, while China State Shipbuilding Corp (CSSC)-controlled Shanghai Waigaoqiao Shipbuilding recently celebrated the completion of hull work of its first cruiseship newbuilding for Carnival Corp’s joint venture cruise brand in China, CSSC Carnival Cruise Shipping.

Cruise ship shipbuilding is no easy feat and is dominated by European shipbuilders. South Korean shipyards have struggled to enter the sector, while Japan’s Mitsubishi Heavy Industries quit the business after incurring huge losses. Nicoll said the development of the Chinese cruise shipbuilding industry is all about two European collaborations. Norway’s Ulstein Design & Solutions is responsible for the X-bow hull design and technical layout of Sunstone’s vessels. Its involvement also includes the entire equipment package purchased in Europe and supervision of its installation. “Also, there is strong government backing under the Made in China 2025 scheme, which included advanced shipbuilding capability. The order from Carnival at Shanghai Waigaoqiao is being driven by Fincantieri’s technology transfer deal, with Fincantieri’s subsidiary Marine Interiors a key player in the fitting out [of the vessel]. So much of the work is still being done in Europe. Critically, the latter is for the domestic Chinese market,” said Nicoll. “It is also a moot point whether European partners would have been able to retain as much control in a partnership with South Korean or Japanese yards, which may have been a deal killer. Certainly, the shift east for cruise/ferry looks more inevitable to European yards than it did 10-15 years ago, although it also fair to say that when these tie-ups were being negotiated, the European yards could see orderbooks stretching to 2025 and it made sense to set up partnerships in Asia,” Nicoll concluded.

Over the last two decades any sustained uptick in dry bulk freight rates has triggered a tsunami of newbuild orders. That was certainly the case when there were spikes in 2007-2008, 2010-2011, and 2013-2014. Will this time be any different? Can the dry bulk sector avoid undermining its opportunity for success? Could 2021 be the next 2006 and come to be seen as the year before the next cycle’s momentum hit its stride?

In my experience a lot of the people answering, ‘yes’ to those questions are the same people who think we’ve arrived in a ‘new normal’. While I’m inclined to respond positively to those questions, I don’t believe that we’re in a new era. I do, however, believe that the complexities of the shipping industry are more visible than they once were, and that’s making a lot more people critically analyze the sector in new ways. I’ve been cautiously optimistic about the direction of dry bulk freight rates since early 2018. Rates had bottomed in 2016 after several years of depressed conditions, and given trends in cargo and fleet growth we seemed to be at the beginning of a sustainable uplift. Unfortunately, two black swans interrupted. First the Brumadinho dam disaster in 2019, and then the global pandemic a year later.

So what makes me more optimistic about the timing now? Three elements: Regulation, commodity economics, and construction. About three-fifths of the dry bulk fleet is non-eco, and approximately 10% are more than a quarter century old. What’s the working life of these vessels post Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII)? They’re going to need to be replaced, and eventually owners will need to make a choice. However, even if they make that choice tomorrow the average lead time in recent years has been nearly two years. Moreover there are very few slots left in 2023 – let alone next year. We can predict with a reasonable level of accuracy that the current state of the orderbook will mean low dry bulk fleet growth in the next couple of years.

In little more than a year we’ll see the arrival of the EEXI and CII requirements. Progress to reduce shipping’s environmental impact fluctuates year to year, but the overall trend and direction of legislators’ ambitions are unmistakable. In the coming decades these regulations should result in much greener ships. Nevertheless, in the short term there’s going to be a lot of vintage vessels that need to earn a living. One of the few ways to comply with those rules will be to slow steam, and that’ll result in an effective reduction of vessel supply. We’re also seeing a lot of uncertainty surrounding propulsion choices. It’s become common to hear companies say that they’ll buy zero-emission vessels once they’re commercially viable, and there’s appropriate refueling infrastructure in place. This is the classic ‘chicken or the egg’ causality dilemma, and the result on the orderbook is equally characteristic. Is it going to be ammonia? Or hydrogen? Maybe methanol? Nobody knows, and nobody wants to be the guy who bet the farm on newbuilds powered by the equivalent of Betamax. In any case, almost all of the biggest shipping banks (ex-China) have signed the Poseidon Principles. So unless you’re a copper-bottomed credit you’ll be struggling to get rates much below double digits to finance newbuilds with hydrocarbon propulsion anyway.

Grains have been strong. Cement has been robust. Clinker has been good too.. The list goes on. We’re seeing broad demand across almost all commodities and it’s leading to some very optimistic speculation. As I’ve said before, unless we see colossal and sustained investment across the world in the construction of low carbon infrastructure, or the urbanization and industrialization of a major nation, such as India, we’re unlikely to be entering a new ‘supercycle’. Nevertheless, it’s relatively common to hear people in shipping talk about the rising price of commodities as a threat to the positive rates we’re seeing across dry bulk classes. However, the reality is that even the highest cost exporters are making substantial profits right now, and commodity prices could decline substantially before the cost of shipping seriously impacts their margins. Over the medium to long term I would expect commodities which are more integral to demand for renewable infrastructure to have a slightly more positive outlook. Whereas those which are more reliant on Chinese growth, such as iron ore and coking coal, are likely to face headwinds.

The inefficiencies that we’re seeing at ports worldwide are providing huge support to vessel availability. Our handysizes have been busy on trades into and out of SE Asia, and have witnessed this first-hand. What’s also helping considerably is how many minor bulks that used to be carried in containers on liner backhauls are now filling the cargo holds of smaller bulkers such as ours. Drewry’s base case for the next five years estimates compound annual demand growth of 3.8% compared to fleet growth of 2.6%. That’s a most-likely scenario which presumes localized lockdowns will continue, trade disputes remain, and a globalized economic recovery – but hopefully no more black swans on the scale of Brumadinho or Covid-19!

Shipping is cyclical and the market will eventually revert to its historical norms course. There are no sure things in our industry, but if I had to pick one macro challenge in the years ahead, it’s the end of the current Chinese five-year plan. Beijing has made clear its desire to bolster strategic reserves of commodities, but once those stockpiles have been accumulated we could see demand drop substantially. As always when it comes to buying newbuildings in the years ahead, caveat emptor!

The average spot rate for capesize bulkers shot upwards on Monday as tonnage supply remained limited in the Atlantic basin. The capesize 5TC, which calculates a spot-rate average off five key routes, gained 6.1% to $34,360 per day, according to the Baltic Exchange. The spike allowed the 5TC to recover from a low of $31,317 per day on Wednesday after slipping 2.6% from a week ago.

“The tonnage list remained tight in the Atlantic, as some vessels were said to be getting delayed in north Atlantic,” the Baltic Exchange said in its daily report on the dry bulk market. “Despite limited fronthaul orders in the market, brokers also noticed offers being pulled back upon the week starting again.”

Swissmarine was rumored to take Thenamaris’ 177,775-dwt Seamate (built 2010) on Monday to move iron ore from Brazil to China at $30 per tonne in the second half of December. By comparison, Brazilian iron-ore giant Vale chartered Star Bulk Carriers’ 190,000-dwt Star Virgo (built 2017) last Thursday to carry the same commodity on the same route in late December at $25.30 per tonne. The Baltic Exchange’s average freight rate for this ore stem was $28.95 per tonne on Monday versus $26.18 per tonne last Thursday.

Average spot rates for the smaller asset classes also avoided any losses over the past week. The panamax 5TC improved 19.3% over seven days to $24,613 per day on Monday, while the supramax 10TC gained 2.2% to $25,119 per day during the same period. The handysize 7TC remained flat over this timespan, declining less than 0.5% to $27,729 on Monday.

Norwegian owner Belships has fixed three of its ultramaxes on period charters of around one year. The bulk carriers, which were not named, have been contracted for 11 to 13 months at gross daily rates of $22,500, $24,700 and $25,000 per vessel. The new charters, expected to begin in December, bring its contract coverage for 2022 up to 42% at an average net daily rate of $22,900 per vessel.

The company said this means its cash breakeven for its remaining open days next year “is close to zero”. Belships’ fleet of 30 supramax and ultramax bulkers have an average cash breakeven of about $10,500 per day. But the new contracts have been fixed at rates slightly lower than other period charters that it has fixed in recent months, reflecting the softening supramax spot market.

Prior to announcing the three new charters, Belships had forward coverage for the next four quarters fixed at around $25,500 net per day on average. Forward freight agreements for calendar year 2022 settled on Friday at $19,617 per day.

Average supramax rates hit an 11-year high of $39,860 per day on 21 October, but have since fallen by almost 40%, according to Baltic Exchange assessments. This quarter, Belships has around 77% of its available vessel days booked at about $29,000 per day net.

Earlier this month, chief executive Lars Christian Skarsgard told TradeWinds: “Contract coverage for next quarter is almost done, so it looks like strong results for Belships can continue, including dividends.“

The company made net profit of $35.2m during the third quarter as freight markets for supramaxes and ultramaxes hit the highest levels since 2008. This enabled the owner to distribute NOK 0.55 ($0.06) per share to shareholders, its second consecutive quarterly payment. The net result is a significant increase compared with the loss of $4.2m in the same period last year.

The company said on Monday: “Based on current market expectations, we expect to generate significant free cash flow and aim to pay quarterly dividends as announced with our dividend policy.”

Vale just announced that it now expects 2021 iron ore production to be 315-320 MMT, versus its previous guidance of 315-335 MMT. However, Vale had previously informed that 2021 production was likely to end up below the mid-point of its guidance, due in part to the company’s “value over volume” strategy.

For 2022, the company now guides for iron ore production of 320-335 MMT, which compares with its previous guidance for year-end capacity of 343 MMT for 2021e and 370 MMT for 2022e – growing to 400 MMT in the “medium term” and 400-450 MMT in the “long term”. Hence, mid-point 2022 iron ore production capacity would have been roughly 360 MMT and compares with consensus’ iron ore production estimate of roughly 350 MMT. The deviation of 20-30 MMT corresponds to c1.5% of the global seaborne iron ore trade, while a less meaningful 0.5% of total dry bulk volumes. However, when factoring in the beneficial distance effect of Brazilian iron ore export volumes, the news is clearly a negative for the dry bulk stocks.

On a more positive note, we find our dry bulk stocks under coverage attractively priced despite the recent rebound, as stocks fell abruptly from their recent peaks. The near-term sentiment should be further supported by the latest uptick in freight rates, with the next month FFA rising 11% in today’s trading, while next year rose 3% to USD22.0k/day.