According to industry sources, the last couple of days have seen residential power across north-eastern China become affected by power rationing and sporadic blackouts. Authorities in Liaoning have implemented power rationing and have asked its citizens to turn off home appliances when not in use, while officials in Jilin Province have restricted power use in several cities and residents in parts of Heilongjiang Province have received schedules of upcoming power outages. 

As winter inches closer, power consumption is set to increase as heating demand picks up pace. Last year and for October through December, China’s thermal energy production was on average 14% higher than the production seen in September. As we have previously noted, China’s thermal power consumption has outpaced its domestic coal production and import quotas has yet not filled the gap, evident by sustained high domestic coal prices. Coupled with firm LNG prices, we find recent reports supportive for China’s thermal coal imports for the remainder of 2021e but note that import quotas would have to be waived before a meaningful uptick relative can be seen.

There is an inconvenient truth for shipping as it gears up for COP26, the major international climate summit starting on Sunday in Glasgow. For the first time since the global financial crisis 13 years ago, shipping’s carbon intensity in 2021 is set to increase, an embarrassing turnaround in green fortunes at a time where regulators are looking more closely at the industry’s greenhouse gas emissions than ever before. Likewise, carbon dioxide emissions are on track for their greatest increase since the collapse of Lehman Brothers. The extraordinary trading conditions for many sectors in shipping in 2021 have seen ships speed up, as well as a huge portion of the fleet forced to idle off congested ports. These twin factors – speed and congestion – have seen emissions rise as well as carbon intensity increase.

Analysts remain divided on just how much emissions have risen year-on-year with Clarksons reckoning that CO2 emissions for the shipping industry will increase 5% in 2021 to reach 855m tons, accounting for 2.4% of global emissions. Even when compared to pre-pandemic 2019 levels, shipping is still on track to register a 1.5% increase in emissions this year, Clarksons data predicts. Mike Konstantinidis, CEO of Greek firm METIS, which runs an annual efficiency ratio (AER) index, has put the emissions growth figure far higher for the full year, likely hitting 15%. As well as the higher speeds, higher freight rates this year have seen many drydocking’s postponed causing unmaintained engines to consume more fuel, Konstantinidis pointed out.

Reacting to the increased emissions news, Faïg Abbasov, shipping program director at NGO Transport & Environment, said that shipping’s increased carbon footprint this year underlined the necessity for governments to focus far more on the industry. “Despite making record profits this year, shipping continues to use the dirtiest fuels and is on course to overshoot the Paris Agreement target by miles,” Abbasov said, adding: “Governments across the world can start tackling this climate menace by including shipping in their national climate targets.” Governments should deploy measures like carbon pricing and fuel mandates to speed up the transition to clean fuels like hydrogen and ammonia, Abbasov urged just days ahead of COP26. “With shipping companies making a killing, now is the time to make them pay to clean up their act,” the environmental campaigner demanded.

The record number of ships idling at gateway ports such as Los Angeles, Shanghai, or Hamburg this year is also widely expected to see an increase in emissions for communities living near major ports. Dr Tristan Smith from UCL Energy Institute, one of the world’s best-known academics looking at shipping and greenhouse gases (GHGs), told Splash Extra that the key to mitigating emissions during market gyrations seems to be logistics and operations management. “The last 12 months have shown how inflexible a lot of systems are and how lacking in resilience supply chains are and how unable they are to deal with small perturbations,” Smith said, comparing the congestion created to a positive feedback mechanism – it takes fleet out of productive service incentivizing those sailing to do so at higher speeds which then only add to the ships queuing up around ports. “If there was ever a time for modernization, digitalization and getting high quality, transparent and functional data access across the supply chain, surely it’s now. The interconnection with GHG is clear,” Smith said.

Kristinn Aspelund, co-founder and CEO at Ankeri, an Icelandic cloud platform determined to give the shipping community the data necessary to make sustainable transport decisions, concurred with Smith on how best to battle big market swings in the short-term. “We should not expect silver bullets but rather try to be better prepared,” Aspelund said, urging owners and charterers to build their business intelligence, automate workflows and become data driven. Former RightShip boss Martin Crawford-Brunt, who has this year debuted shipping sustainability advisory Lookout Marine, said that short-term carbon emissions in shipping can be mitigated through a better understanding of the actual vessel emissions, based on a completed round voyage; the loading, discharge, and any ballast legs to reach the load port. “When the actual emissions per round voyage – or a reliable and consistent estimate – is presented on the basis of the actual transport work done, not only the absolute emissions or based on unvalidated theory, the supply chain will be in a much better position to assess whether a more carbon efficient alternative exists for the carriage of the same cargo,” Crawford-Brunt maintained, suggesting the International Maritime Organization’s Energy Efficiency Operational Index (EEOI) is the best tool to achieve this.

COP26 starts on Sunday with shipping determined to be on the front foot as regulators around the world deliberate how best to slash shipping’s emissions. Determined to get its side of the story heard, the International Chamber of Shipping (ICS), a shipowning lobby group, is putting on a high-level green shipping conference next week in Glasgow. Reacting to the news that shipping emissions are up this year, an ICS spokesperson told Splash Extra: “To some extent, this is a natural consequence of the massively increased demand on shipping following the disruption of Covid-19.” The ICS spokesperson stressed shipping is committed to reach net zero carbon emissions by 2050.

If bulk carrier freight markets were a tradeable equity (as indeed they are these days via ETFs) then October could be the month we look back on as being when we switched our collective strategy from Buy to Hold. The BDI began the month at 5,202 points and peaked at 5,650 points on October 7. By October 21, the BDI had retreated to 4,653, down 997 points or 18%. That puts the BDI firmly in what equity analysts would call correction territory.

The capesizes, those doyens of the dilettante investor, stumbled hardest. Having risen from $46,987 to $74,186 during September, the capesize 5TC scaled further peaks in October, topping out at a breathless $86,953 on October 7. These levels haven’t been seen since the 5TC was in short trousers as the 4TC, back in 2009 when China, at that time quite keen on increasing steel output, was hoovering up all available spot supplies of iron ore, the price of which had collapsed following the 2008 credit crunch.

This time, falling iron ore prices will not spur a Chinese buying spree. The news from China was confirmed: no growth in steel production this year, only a 4.9% increase in GDP for Q3, a property market bubble imploding with enough spare housing for 90m people characterized by Evergrande’s liquidity crisis. Energy shortages shuttering manufacturing especially in the north as dwindling coal inventories were corralled for domestic heating.

Understandably, the freight markets drew in their bullish horns. The capesize 5TC fell 41% in two weeks to $51,463 on October 22 with most shipbrokers admitting that charterers still had the whip hand, though many owners were just not offering tonnage to stop what one broker called “the bloodbath”.

Such drama is a feature of the volatile capesize market. In calmer seas, over the same two weeks to October 22, the Baltic’s Handysize 7TC time charter average rose 2% to $37,033, having put on weight since September when it stood at $33,457. This year has been High Summer for handysize owners with quarterly average income rising from $18,484 in Q1 to $21,793 in Q2, $32,227 in Q3 and $36,099 in Q4 to date. Taylor Maritime could not have chosen a better moment for its London IPO than 2021. Judged through the lens of freight income to capital cost, handies trump capes every day this year.

Owners and investors wanting to hedge their bets could either short the FFA market or take time charter cover. According to shipbroker Arrow’s regular panamax report, on October 22 a modern kamsarmax could achieve $34,000 per day on a one-year charter in the Atlantic or $32,500 in the Pacific. The FFA market drops below that level in Q1 2022 with the bidding at around $27,000 for the quarter. That looks like a tradeable differential from here. But will charterers take the bait on physical ships with the market sliding?

Owners fearing the end of this bull market can grasp at this straw: the seasonal pattern in bulk carrier freight markets for the five years to 2020 shows a market rising steadily from Lunar New Year to a peak around China’s National Day in October, then a decline to the next Lunar New Year. The correction we’ve witnessed might only be the usual seasonality. After all, supply growth remains constrained with most analysts expecting no more than 4% growth in the bulker fleet this year. The downside of this view is that it means the market continues sliding all the way to wishing each other Gong Xi Fa Cai on February 1 next year.

Finland’s ESL Shipping still sees plenty of potential for rate rises for smaller bulkers after logging record earnings in the third quarter. The company, owned by the Aspo group, said operating profit to 30 September was €7.1m ($8.2m), against a loss of €0.1m a year ago. Revenue was up at €47.3m, from €31.6m in 2020. Rolf Jansson, chief executive of Aspo, said the current hot markets have led to the highest results in ESL’s history. “The very high demand for the transportation of forest industry products, sawn goods, and pulp, as well as metal industry products, has continued to increase cargo prices, important to ESL Shipping,” he added.

The handysize and supramax company operates 52 ships, of which 24 are wholly owned. Freight rates are much higher in all vessel categories, ESL said. “In the smaller vessel category, the price level in new and extended time-chartering contracts has increased, and is expected to still increase significantly,” the company added.

The shipowner is aiming to improve its flexibility, keeping under scrutiny the number and specifications of time-chartered bulkers. ESL said its competitive edge is based on its ability to responsibly secure product and raw material transport for industries and energy production year-round, even in difficult conditions.

Cargo volumes increased to 3.9m tonnes in the third quarter, from 3.1m tonnes a year ago. The company said ports have continued to be very congested in ESL’s main operating areas due to higher traffic volumes, and partly due to the impact of the coronavirus pandemic on terminal operations. Volumes among all steel industry customers increased significantly from the exceptionally weak comparative period, the owner added.

“The development of raw material prices and the uncertainty related to availability may affect the development of international cargo markets during the rest of the year,” the company added. And the shipowner warned that difficulties in the availability of semiconductors has also restricted production in the automotive industry in Europe, and this may also have an impact on transport volumes in the steel industry.

New York-listed Pangaea Logistics Solution is the latest public dry bulk owner to draw significant investment from a prominent “long only” institutional investor. Boston-based Wellington Trust, an arm of Wellington Management, has bought up 2.4m shares, good for about 5.2% of Pangaea, which is a specialist in niche-market and contract trades, a public filing shows. The number are up from a holding of 1.78m shares disclosed in August.

The position may be yet another sign that buy-and-hold institutions are getting friendly with the longevity of the current dry bulk bull market. Wellington follows Boston neighbor Fidelity Investments, which has taken a 10% position in Greece’s Star Bulk Carriers and a 12% stake in New York-based Genco Shipping & Trading.

Dry bulk executives and equity analysts following the sector have made the case for an extended bull run given the lack of newbuilding tonnage scheduled for delivery over the next two years and continued hesitation over future propulsion systems.

Positions by long-only players like Fidelity, Wellington and Neuberger Berman were once commonplace in shipping during the last shipping boom cycle of the 2000s but have largely faded from the landscape as shipowners failed to string together extended periods of peak earnings.

Pangaea, led by chief executive Ed Coll, is a closely held public owner based in Newport, Rhode Island. Pangaea over 2021 has seen a gradual sell down by its largest shareholder, Cartesian Capital, which went from some 13.95m shares and 30.6% of the owner down to about 1.6m and a 3.4% stake. Cartesian’s exit has been seen as likely to create additional trading liquidity for other investors, including a Wellington, to move into the stock. “We are always happy to welcome new shareholders that know our industry and take time to understand the business strategies that differentiate Pangaea Logistics Solutions from peers,” said interim CEO Mark Filanowski, who is leading Pangaea on a temporary basis with Coll on sick leave.

Like many dry bulk owners, Pangaea has seen shares appreciate over the course of 2021 in a robust market. The stock is up about 60% from its January opening at $2.76 per share, closing Tuesday at $4.40. Pangaea will have a total of 24 owned vessels when the final two units in the newbuilding program are delivered later this year.

Wellington lists more than $1trn in assets under management and is led by chief executive Cynthia Hynes.

Newcastlemax owner 2020 Bulkers has posted its biggest ever quarterly profit and its largest dividend to shareholders for the third quarter of 2021 on the back of rising freight rates. The Oslo-listed shipowner reported net income of $21.6m for the three-month period, equivalent to 98 cents in earnings per share. This is up from $4 .8m in the third quarter of 2020. The firm has declared total cash distributions of $0.97 per share for the months of July, August, and September. The shipowner paid out a total of $37.5m in dividends during the first nine months of 2021. It has declared dividends or cash distributions for 15 consecutive months.

2020 Bulkers’ vessel revenue during the third quarter totaled $33.9m, more than double the $16.3m earned during the same three months last year. This equates to gross average time-charter equivalent (TCE) earnings of about $46,000 per day during the period this year. These earnings have risen to around $65,500 per day during the fourth quarter so far, the company said. All eight of 2020 Bulkers’ Newcastlemax bulkers are fixed on index-linked period charters to major commodity traders. Six are on charter to Koch Logistics and the other two are contracted to Glencore.

In September, the index-linked charters for the 208,400-dwt vessels Bulk Shenzhen and Bulk Sydney (both built 2020) were converted to fixed-rate contracts at $61,628 and $60,260 per ship per day for the final two months of 2021. Both vessels are chartered to Koch until 2020 and are earning a profit share, based on the fuel-cost savings from the scrubbers fitted onboard. 2020 Bulkers beat the consensus estimate for net profit by $2m and the earnings-per-share estimate by 6 cents. Its 97-cent dividend was much more than expected, compared to the consensus estimate of 87 cents per share.

The shipping equities research team at Norway’s DNB Bank said that much of the results had been pre-announced and were line with the adjusted consensus’ expectations, which should limit estimate revisions. “Furthermore, a large portion of fixed time-charters for the remainder of 2021 leave limited unknowns in our view,” the team said in a note on Wednesday. “Hence, the results should warrant a neutral share price reaction in a flat market.” 2020 Bulkers’ shares were trading at NOK 118 during mid-morning in Oslo, down by 4.5% since the market opened.

The company’s third-quarter results also reveal that a collision involving one of its vessels has cost $2.8m. The 208,400-dwt Bulk Shenzhen (built 2020) collided with a Reuben Brothers-owned bulker in August while laden on the Yangtze River in China, with a pilot onboard. There was no harm to personnel or the environment. The vessel was off hire for 14 days while it underwent inspections and repairs in China. The costs were incurred in insurance deductible, off-hire, as well as the difference between the vessels’ off-hire insurance of $35,000 per day and the prevailing index rate.

Freight derivatives for capesize bulk carriers have seen an almighty sell-off over the past week, but now options holders are quickly finding themselves exposed to losses. It is a situation that would have been unthinkable just over a month ago. The kryptonite in the capesize forward freight agreement (FFA) market is the relatively large volumes of call options that have been struck in the last couple of weeks at prices between $27,000 and $35,000 per day for November and December contracts. These were likely bought early in the year, when there was a more bullish outlook to the market — all of which changed around a month ago, when concerns surrounding China’s economy and commodity demand intensified. If the market moves below these levels, this exposes the sellers of those puts to the downside. And during the day’s trading on Tuesday, it seemed as though the moment had come. Bidding for November contracts was at $29,800 per day and for December contracts was around $26,500 per day.

One trader likened the potential downside squeeze to the GameStop short squeeze “but in reverse”, referring to the extraordinary 1,500% increase in the retailer’s share price during two weeks in January. Now FFA traders are worried that hedging this exposure could create even more wild moves in the paper market. “The potential for extreme volatility in cape FFAs is there, as the volume of open option strikes sitting 15-30% below the current market could create hedging trade flow above and beyond the liquidity available in the futures market,” one trader told TradeWinds. “A lot of fresh puts were traded over the past six weeks.”

In the physical market on Tuesday, Baltic Exchange panelists assessed the 5TC average capesize spot rate $3,965 lower at $43,985 per day. Philippe van den Abeele, chief investment officer of Consortium Maritime Trading Ltd, sees a critical threshold approaching. Looking at the derivatives market from a technical point of view, the capesize spot market has maintained a resistance line of around $38,000 per day over the past 10 or 12 years, he explained. In other words: “Every time we’ve reached that [level] over the past 10 years, capes tended to turn south with prices dropping quite consistently for the next three to four weeks.” An exception came in July, when the capesize 5TC assessment broke through the $38,000 level and kept on going until it reached the multi-year high of $86,870 per day on 6 October, van den Abeele noted.

“I’m not saying I think it will happen, but I’m watching it like a hawk because I am convinced that if it breaks $38,000 [per day] convincingly on the downside then you will see a fresh bunch of sellers coming in to the FFA market,” he added. “The possibility of bouncing higher from that level is equally feasible as we have reached a pivotal level in the recent cape freight pricing rollercoaster, as dry bulk prices tend to be mean-reverting over time.” There is a psychological element to this potential watershed too, van den Abeele said. “Just imagine, until three or four weeks ago the majority of the people out there held long cape positions for December delivery or at least till the end of November, believing that the Chinese congestion combined with exuberant Chinese steel production was going to last until then,” he said. “When that crowd realizes ‘Oh, it’s not going to happen’, it’s like you’re going through a funnel — they all want to get to the exit, but the door is very small for everyone to go through it.”

Once the market decides to sell, everything tends to accelerate, he explained. “Shipowners start to panic in the physical market, the FFA market also panics, therefore the shipowners see the FFAs go down and it goes faster and faster,” he went on. “That’s why we have this massive drop — because the equilibrium at which you reach $86,000 per day is fragile, very fragile,” he said, referring to the spot market’s zenith. This acceleration effect was visible in the FFA market last week, according to Kerry Deal, head of business development at Freight Investor Services. “The fall in capes [last] week was admittedly steeper than some expected, with a storm of bad news driving sentiment lower on the paper, which included further issues at Evergrande, concerns on further Chinese steel production curbs, and Vale trimming down [fourth-quarter] production guidance against falling iron ore prices,” Deal told TradeWinds.

According to industry sources, during September, global crude steel production amounted to 144.4 MMT – split between 73.8 MMT in China and 70.6 MMT for the rest of the world. Steel production in China was down 9.4 MMT MOM, while steel production outside China was down just 3.0 MMT. YTD, steel production outside China is thus up 6.8 MMT (or 11%) and has therefore negated some of the recent Chinese weakness.

The broader dry bulk recovery beyond Chinese demand has been an important theme of the recent dry bulk upcycle, and we are encouraged by the diverse drivers for an improved market. Still, China certainly remains the most decisive factor for dry bulk freight rates, and especially the Capesizes, as 76% of seaborne iron ore volumes went to China in 2020.

Japan, which boasts the world’s third largest merchant fleet, has had a volte-face in terms of its green shipping targets.

The Asian nation has often been castigated for its timid shipping environmental pledges at the IMO. However, it has emerged today that the Japanese delegation to the IMO’s Marine Environment Protection Committee (MEPC) gathering next month will back calls for shipping to become a net zero industry by 2050, far stricter targets than the current IMO stance which demands shipping slash its emissions by at least 50% compared to 2008 levels over the next 29 years.

The US was the first major shipping nation to make a net zero call this April, something which has since been backed up by other countries including the UK.

In other noticeable government green pledges, just ahead of COP26, the major international climate summit, Australia, a major fuel exporter, has come out with its own net zero commitments by 2050.

CEO of Alvean Sugar SL, the world’s largest sugar trader, recently stated that the share of refined sugar trade done using containers had fallen from its pre-pandemic level of 80% to around 60%. According to Clarksons, 2019’s white sugar trade in dry bulk amounted to 26 MMT and would suggest containerized volumes of 108 MMT. The CEO’s numbers would imply a doubling of white sugar volumes on dry bulk vessels and contribute to the current tight dry bulk markets.

 
The phenomenon is not isolated to sugar and has been evident for several commodities which have favored cheap container boxes over shipments in bulkers in recent years. For example, a rice exporter in India is looking to use a dry bulk vessel for a shipment of rice equivalent to 10 full containers.

The switch from container boxes to bulk vessels has been apparent for some time, with certain stakeholders citing numbers up to 10% of volumes for Supramax bulkers. In our view, this could explain some of the consistent strength seen thus far in 2021 for the smaller vessel segments.