The news of the Omicron variant from South Africa rippled through the financial markets on Friday as stocks, treasury yields, and oil sank. Countries around the world have now begun implementing travel restriction to and from South Africa in efforts to control the spread. The WHO has stated that it is too early to tell how impactful this strain is relative to the others, but a meeting has been called to determine that potential concern.

As the shipping industry grapples with a logistics crisis, China has instated up to a 7-week mandatory quarantine for returning Chinese seafarers and prohibiting crew changes for foreign crew under the zero Corona policy. Even vessels that have switched crew elsewhere will have to wait two weeks before being allowed to port in China. The knock-on effects are being felt as shipowners and managers have had to reroute ships, adding to the global supply chain crisis. Ship congestion seemed to be easing in the US and Asia, but market participants expect the scope to worsen. Meanwhile, the EU’s situation does not seem to show signs of becoming less severe.

In the first ten months of 2021, China’s grain imports expanded by nearly 20 MMT (+19%) y-o-y to a record 123.4 MMT, buoyed by a strong corn import program from USA. Historically, soybeans comprise around 85% of its total grain imports in any given year. However, corn rather than soybeans accounted for China’s 2021 growth in grain imports. In fact, soybeans registered a slight decline of 4.1 MMT (-5%) y-oy, with Brazil shipping 12 MMT fewer tons (-19% y-o-y) due to a slightly lower soybean harvest this year.

China’s corn imports topped 26 MMT (+18.4 MMT/+236%) y-o-y by October, with US shipments alone expanding by 16.3 MMT (+650%) y-o-y to a record 19 MMT; the 250 extra shipments y-o-y from USA in the first six months of the year was a factor driving the rise in the sub-Cape market. Corn shipments from USA have now petered out and may not be as active next year as China has had a good domestic corn harvest and swine numbers have now stabilized to pre pandemic levels.

Falling USA corn imports to China coupled with the end of the Brazilian soybean export season has led to China’s October grain imports falling away to just 8.2 MMT in October, 4.3 MMT lower than the 12.5 MMT imported in September and the lowest monthly grain import figure since March of last year. This sharp fall in grain imports has clearly impacted the Panamax market, which has witnessed a sharp decline from mid-October as rates on Panamax from US Gulf/China have fallen in just over a month from a high of $92 to a current rate of $68/ton. This may slip further due to the oil price collapse at the end of last week.

Across the asset classes, Handies have been amongst the strongest performers this year. They have also shown greater resilience as rates have fallen for all bulker sizes over the past few weeks. We look at the various factors that are providing the support.

Following the recent decline in freight rates, Handy size earnings are still up by 244% versus average levels last year, vastly outperforming Capes and Panamaxes which are currently up 140% and 125% by comparison. At $27,640 per day, average Handy rates are also currently at a premium to those for Kamsarmaxes in absolute terms, and for 30% of the year so far, they have printed higher than the Capesize index.

One of the greatest sources of Handy demand growth this year has been scrap steel. In 2021 so far, Handies have hauled 14.4 MMT of scrap cargoes, up by 32% YoY. Some of this is due to the strength in the container market. Scrap cargoes are typically shipped in containers as well as bulkers, and with container freight being extremely expensive for most of this year, some shippers have opted to transport cargoes in bulk. Exacerbating this effect, liner companies often price freight for scrap, which tends to damage containers, at a premium to that for other cargoes which are more standardized, cleaner and lighter. It is difficult to quantify this effect, but there are signals that it is occurring.

Forest products have been very supportive of the Handy segment. Shipments of these goods over January – October were up by 8% YoY. Within this, log trade is up by a modest 4%, while shipments of woodchips have shot up by 21% YoY. The UK, the second-largest bulk woodchip importer, is driving steady growth in these volumes, growing by 9% YoY so far in 2021 as its biomass-fueled power generation continues to ramp up. Japan and the Netherlands, have also seen solid growth in their woodchip intake against a backdrop of energy shortages and switches away from coal. Increased volumes of these cargoes are of course positive for demand, but they alone do not explain why Handy employment from these trades has jumped by a disproportionate 14% YoY. Elevated times spent waiting to discharge have increased the demand intensity of woodchip and log trades, particularly in China, where river pilots are in short supply due to quarantine measures and vessels still face lengthy testing and clearance procedures. Handies spent 11 days waiting to discharge these goods in China last month, up from 2 days in October 2019, and average sailing durations have ticked up by 35% YoY as more woodchips is sourced from distant origins such as Canada, Chile and Brazil.

Demand for Handies from fertilizer trade is up by 4%, despite shipments only increasing by 2% YoY. Global demand for fertilizers remains extremely high but supply is tight, as natural gas shortages have crimped production of this energy-intensive commodity. The Handy market has been tightened by a surge in congestion in Brazil, mostly related to this trade. The queue there currently stands at 1.7 MDWT, more than double the five-year average for this time of year, while the average time spent waiting to discharge fertilizer cargoes last month was up by 77% YoY at over 10 days. This is partly down to an increase in Brazil’s purchases (YTD imports on Handies are up by 20% YoY at 26.3 MMT), backed by consistent growth in crop plantings, on top of inefficient port infrastructure and competition from larger vessels with higher demurrage rates.

Demand for other minor bulks such as salt, sulphur and mineral sands has also proved strong, and the various cargoes in the ‘other’ category accounting for 27% of the growth in Handy demand so far this year. Employment from these goods has grown by 25% YoY over the first ten months of 2021, and again, greater disruption and inefficiency appear to have boosted this figure. Handy shipments of these commodities have become 12% more demand intensive this year versus average levels pre-COVID. Here again, some strength is likely coming from the container market where cargoes can be shipped in bulk, though it is difficult to quantify the impact of this.

Underlying this year’s rally on the Handies has been very low supply growth, due to several years of underinvestment in the sector. Handy capacity, in DWT terms, has increased by 16% since the start of 2014, the lowest of all of the bulker segments. In comparison, the Supra, Panamax and Cape fleets grew by 42%, 29% and 28% respectively over this period. This has helped to narrow the average spread in earnings between these vessels and their larger cousins.

The fundamentals for the Handy market remain positive; we believe that growing volumes of minor bulk trade combined with a historically depleted orderbook will provide a floor to utilization going forward. However, many of the aforementioned COVID and non-COVID related inefficiencies do represent a risk to freight as they begin to unwind in the coming months. Equally, while the container market remains extremely hot, a slowdown in this sector could sap some of the demand that has filtered into the bulker market this year.

John Fredriksen’s Golden Ocean Group is expecting favorable market fundamentals to last for years yet, as profit continues to roll in. The world’s largest listed owner of capesize vessels said net earnings in the third quarter were $195.3m, up from $39m in the same period a year ago and from $104.5m in the second quarter. Oslo and Nasdaq-listed Golden Ocean posted revenue of $387.6m, against $185.5m in 2020.

Chief executive Ulrik Andersen said the company had maintained significant exposure to the strong freight rate environment throughout the year, resulting in significant cash flow generation. “We have already contracted more than 30% of our open days for the first quarter of 2022, mitigating risk and ensuring cash generation into next year,” the CEO added. “The combination of expected global demand growth, modest fleet growth and inefficiencies we believe will persist in the coming years creates a powerful dynamic for Golden Ocean,” Andersen said.

Time charter equivalent (TCE) earnings for capesizes were $38,142 per day in the quarter, while panamaxes and ultramaxes achieved $24,733. The whole fleet averaged $32,262 per day.

In the fourth quarter, Golden Ocean’s capesizes have 83% of days booked at a stronger $41,900 per day. Panamaxes are fixed at $27,300 for 87% of the available days. For the first three months of 2022, capesizes have cover at $33,200 per day for 30% of available days, and panamaxes have 36% of days booked at $24,150. The company has handed over $321m in dividends so far in 2021, including a pay-out of $0.85 per share in the third quarter.

Global growth forecasts remain strong, and albeit volatile, rates have remained at very profitable levels, the shipowner said. “Although challenges remain as various countries suffer through incremental waves of Covid-19 cases, the combination of healthy underlying demand growth and modest fleet growth is supportive of a positive market outlook for the coming years,” the company added.

Golden Ocean is however monitoring developments related to the Chinese real estate industry, which accounts for 30% of domestic steel demand, as well as the potential for stimulus-driven infrastructure projects to offset any decline in demand. The group also believes the Chinese government will seek to reduce industrial production activity as the 2022 Winter Olympics approach, to reduce air pollution during the games. “The company’s constructive market outlook is based on both the continuing recovery in global demand for dry bulk commodities, and equally importantly, powerful supply-side dynamics that have not been present for many years,” Golden Ocean said.

The company recorded a gain of $11.3m from its investment in bulker owner SwissMarine, but its holding in wind farm vessel owner Eneti, the former Scorpio Bulkers, brought in a $0.4m loss.

Golden Ocean Group is ready to reap the rewards of an expanded fleet thanks to healthy forward coverage, Clarksons Platou Securities has said. The Oslo-listed bulker owner acquired 18 modern vessels earlier this year from major shareholder John Fredriksen’s private Hemen Holding. This “proved to be a timely acquisition which has benefited the company” in the third quarter and into the final three months of the year, Clarksons Platou managing director Frode Morkedal said.

Seven new kamsarmaxes are also on order in a fleet rejuvenation process costing $237.8m, with early delivery in 2023. The company has sold two of its oldest panamax vessels this year, freeing $22m, and has signaled further sales could be on the cards. Golden Ocean bosses have told Clarksons Platou they are not looking to order more bulkers, however. The owner has one of the youngest fleets among the listed owners and is thus well-positioned for upcoming carbon regulations, the executives believe.

Management is also bullish on the effects of the IMO’s new energy efficiency regulations coming into force in 2023. The bosses think a reduction in the effective fleet capacity of between 2% and 4% could be realistic as owners adjust to the new rules. “Sentiment in the capesize market is on the mend,” said Morkedal. Golden Ocean is hoping for a mini rally at the end of the quarter, then expects a seasonal slump in the first three months of 2022, he added. But the group has already secured good coverage for this period, Clarksons Platou said.

The investment bank expects “significant cash flows” from forward fixing, as 30% of the 56 capes are booked at $33,000 per day in the first quarter of next year. “This could secure at least another NOK 3 ($0.33) per share in dividends based on the low forward freight agreements (FFA) market indications of $16,000 per day,” Morkedal said.

“While investor sentiment for dry bulk is currently soft, we share the company’s optimistic market view based on the low fleet growth, continued operational inefficiencies and the likelihood of a cold winter supporting coal trades,” the analyst added. For the fourth quarter, Golden Ocean has booked 83% of capesize days at $41,900 per day, based on load-to-discharge accounting. This means any unpaid ballast days at the end of the quarter are not included, typically reducing actual earnings below the headline rates. “However, when we talked to management, we got the impression that this factor might not be very large this quarter; hence we believe achieved capesize earnings could come in at around $39,000 per day,” Morkedal revealed.

Panamax markets are looking better for the first quarter, supported by grains and with a lot of coal flows likely to benefit the vessel class, management told the investment bank. In the medium term, Golden Ocean said it is positive due to the global economic recovery expected to extend through 2022. Clarksons Platou has a “buy” rating on the stock.

Shipping is a notoriously volatile industry, one that has burnt many investors over the years. Yet, even by its own extreme standards, the volatility experienced across all the main shipping segments during the pandemic has been extraordinary, with all sectors experiencing earnings up by at least 100% as well as down by 50% since the start of 2020.

Analysts at investment bank Evercore have charted the indexed performances for VLCC, MR, capesize, LNG carrier, VLGC and neopanamax containership TCE earnings or main trade spot rates since the beginning of 2020 highlighting the extraordinarily fast peak and troughs in earnings for shipping during the Covid-19 era.

“Core fundamentals do not result in this level of extreme volatility, with anomalous factors like port congestion, floating storage arbitrage, and regional commodity shortfalls (and associated arbs) the primary reasons for the massive peaks and valleys. These temporary drivers are not new to the industry but have reached a new level of impact in the last two years, making it harder for investors to trust what is secular and what is temporary,” Evercore stated in a note to clients.

The sharp moves both up and down have made it tricky for shipping stock investors beyond the shortest of time periods, Evercore suggested, noting how in pre-Covid times the supposed appeal of shipping equities have been the sharp cyclical volatility that provides opportunities to capture tremendous upside in tight markets and equally robust downside when the pendulum swings the other way. The “level of whiplash” over the past couple of years, Evercore said, has been bruising even for the nimblest investor.

Capesize spot rates continued to recover lost territory across the key trades on Tuesday as C Transport Maritime (CTM) locked a Diana Shipping vessel for a year. The day’s fixture action saw rising rates for iron ore runs to China both from Brazil and Western Australia. Tai Chong Cheang Steamship’s 180,000-dwt KWK Legacy (built 2011) scored a $27 per tonne iron ore fixture for a journey from Tubarao in Brazil to Qingdao, China. The charterer was not disclosed. The rate was somewhat higher than the last-done deal for a similar journey at $23.45 per tonne on Thursday, which involved a larger cargo stem.

“Limited gossip circulated from the Atlantic basin but most brokers saw the rates remaining firm,” said the Baltic Exchange in its daily report. In the Atlantic, Rio Tinto have booked the 169,000-dwt for a journey from Dampier to Qingdao at $13.50 per tonne, and there was talk of the miner grabbing another vessel at $14.25 per tonne. That compares to last-done fixtures at $11.70 to $12.25 per tonne on Friday for Western Australia to China voyages.

The fixtures helped push average the 5TC, an average of spot market earnings in the capesize sector, to $33,631 per day, a 4.4% jump from Tuesday and the highest level since 1 November. Rates are still well below their peak in early October, when the 5TC neared $87,000 per day. But Breakwave Advisors, which runs a dry bulk exchange-traded fund, said there are factors that point to a rally ahead, despite continued bearishness over China’s soft industrial activity. “Coal demand remains strong across most regions, especially ex-China, port congestion persists at relatively high levels versus history, and winter weather is already causing further disruptions and delays in shipping operations, more recently at Chinese ports,” the firm said on Tuesday.

In the period market, John Michael Radziwill-led CTM signed up for an $11.9m charter of Diana’s 174,000-dwt Semirio (built 2007). The vessel will earn $19,700 per day, minus a 5% commission, for a charter that runs through 15 August 2023 at the earliest, with the latest redelivery date on 15 November of the same year. The deal is somewhat longer than the term on three period charters that New York-listed Diana forged on Monday. It comes as term charter rates have been on the decline, with Clarksons assessing earnings one-year charters at $22,000 per day on Friday, down from a peak of $35,600 per day in early October. While Diana’s latest fixture comes in below that rate, it is higher than the $17,750 per day that the shipbroking giant estimated that a three-year charter would earn. The deal also marks improved earnings for the Semirio, which had been earning $13,500 per day, minus commission, on its last charter.

Also rebounding on Tuesday were panamax bulker rates, with the Batlic Exchange’s average of time-charter earnings inching up $380 to $21,000 per day.

Newly released economic data from China’s National Bureau of Statistics indicates Fixed Asset Investment (FAI) in infrastructure and manufacturing increasing by 2.3% and 14.2% YoY respectively, the lowest YoY growth rates so far in 2021.

Industrial output, however, increased by 3.5% YoY, rising by 0.4 points versus September’s figure, which was the lowest YoY growth rate so far in 2021.

The construction sector showed floor space under construction in October at 7.1% YoY growth, also the lowest YoY expansion in this segment in 2021. Chinese house prices increased by 3.4% YoY, the lowest yearly housing price increases since January 2016, as the construction and housing sectors continue to struggle with liquidity. Despite this, the People’s Bank of China today kept the country’s 1-year Prime Loan Rate unchanged at 3.85%.

One bright spot was in the automobile sector in October despite facing a severe shortage of semiconductors, a key input for a vehicle’s electronics. Automobile production totaled 2.3m units in October, rising by 12.2% MoM and the highest monthly total since March. Further, Chinese auto exports amounted to 220k units in October, the highest total in the last 10 years. 

According to Chinese customs authorities, iron ore imports for October came in at 92 MMT, down 14% YOY, taking the YTD total to 934 MMT, which is down 4% compared to the first ten months of 2020. The YTD import growth was +6.0% by May, while the five months since has been -13% below the same period last year. Domestic production continues at elevated levels, with October coming in at 80 MMT, up 2% on October 2020 while 10% above the October average of the last three years.
 
Slower iron ore imports feeds into slower steel production. October was 71 MMT, down 23% YOY, taking the YTD total to 877 MMT, flat YOY. Chinese steel production growth peaked in April with a +17% YOY increase. Pig iron production was 63 MMT in October, down 13% YOY, taking the YTD production levels to 734 MMT, down 1% YOY. Pig iron accounts for 84% of the total steel production YTD, down from 85% in the same period in 2020 while in line with the five-year average.
 
For the dry bulk supply and demand, slower import growth of iron ore is partially compensated by strong coal imports. The October statistics indicate 27 MMT imported, nearly double the import in October 2020, taking the import growth for the last three months to +65%.

Going forward, economic stimulus in China should support dry bulk demand. Financial regulators recently told Chinese exchanges that “high quality” property developers can issue new asset-backed securities to refinance maturing debt. No developers have sold asset-backed securities since August, when authorities started restricting approvals to limit the ramifications of Evergrande’s financial distress. Also, rules regarding interbank bond lending will be relaxed going forward, measures that are likely to free up liquidity and aid the Chinese housing market, ultimately supporting dry bulk freight rates.
 
The FFA for 2022 currently stands at USD22.4k/day. While this remains below the early-October level of USD29.2k/day, it is up 18% since the start of last week and compares to our estimate of USD24.3k/day.

US financial giant Fidelity has unveiled a major investment in UK shipping fund Tufton Oceanic Assets as it continues to build its shipping portfolio. The Boston-based investor said in a UK stock exchange filing that it now owns a 5.55% stake in the London-listed tanker, bulker, and containership owner. This slice is worth $23.8m based on a market cap of $429m. The shares were acquired during Tufton’s latest over-subscribed $39m tap issue of stock as the shipowner raises more funds for vessel acquisitions. Market sources said Fidelity did not have a stake in Tufton before this.

Tufton itself told TradeWinds: “The tap issue had both new and existing investors participate and was oversubscribed. As a matter of policy, we do not comment on any specifics other than that we love all our investors past, present and future.” But the company said it is “very pleased” with the equity raise. “We believe investors are very drawn to our strong portfolio and commitment to reallocating capital within shipping as markets evolve,” Tufton added.

A spokesman told TradeWinds that the portfolio is split roughly into thirds between tankers, containerships, and bulkers, with average charter cover of two years. “A lot of investors appreciate this at a time when there are headlines about the BDI falling dramatically,” he said. “A lot of really great investors are backing Tufton at the same time the drop in the BDI is in the press, which means they really understand and appreciate what we are doing and that we are also putting in more of our own money in the fund every time it grows,” he added.

In August, mammoth Boston-based institutional investor Fidelity disclosed a $207m position in shipping’s largest US-listed dry bulk shipowner, Star Bulk Carriers of Greece. Fidelity’s enlarged stake is 10% slice of the Petros Pappas-led company, making it the second-largest holder after private equity’s Oaktree Capital Management, which has 26m shares and a 25.4% stake. TradeWinds reported on 13 July that Fidelity had built up a 12% stake in New York-listed Genco Shipping & Trading, allowing it to move past another private-equity backer, Centerbridge Partners, as the bulker owner’s biggest investor. Fidelity also holds 4.2m shares in John Fredriksen’s Golden Ocean Group worth about $44.5m, 422,000 shares in Eagle Bulk Shipping valued at $19m, 888,000 shares of Safe Bulkers worth $3.3m and 387,000 shares in Diana Shipping valued at $1.9m.

In July, two big UK investment funds sold down stake’s worth about $15.6m in Tufton Oceanic Assets after the stock price rose 33% over the past year. London’s Pictet Asset Management said it had cut its stake from 9.23% to 4.64% on 19 July, with 12.5m shares left. And UK-based Newton Investment Management reduced its holding from 5.22% to 4.85%, retaining 13.1m shares. This is a combined disposal of about 5% of the shipowner. In Tufton Oceanic’s latest annual report covering the period to June 2020, Pictet was ranked third and Newton sixth in the list of largest shareholders. South Yorkshire Pensions Authority is top on 10.81%, with East Riding Pension Fund second with 9.71%.