The Covid-19 pandemic has been one of the greatest shocks to the modern world, disrupting people’s lives, the way societies and economies operate and how trade is done. Shipping markets have been thrown into turmoil and are struggling to operate properly, even where they have benefited in the bulk and container sectors. Container shipping is the standout sector, making a screeching handbrake turn from dismal prospects at the outset of the pandemic to an earnings bonanza. Container freight and boxship charter rates have gone through the roof as people around the world found themselves locked down, unable to spend on services and socializing, and instead bought more.

Much of the Western world went from panic over shortages to mass online buying, while economies have also emerged from a hiatus with growth surges. Port congestion and lack of shipping capacity and crews and dock staff hindered by infection rates and lockdown rulings have in places turned trade full circle back to the threat of empty supermarket shelves. Through it all, governments reliant on world trade have recognized seafarers as key workers but failed to act on their words. They have done far too little to alleviate the crewing crisis. Seafarers have too often been unable to leave or join vessels for lengthy periods, causing untold physical and mental harm and potentially stacking up a future crew shortage. The lack of truck drivers in the UK, driven mainly by its exit from the European Union making it uneconomic or unappealing for them to come to Britain, has led to the country just about running out of petrol at the pumps. An inability to deliver could be an issue the global supply chain will have to face because of the crewing crisis. And while such factors spurred the boom for container and bulk shipping, that boom has in turn spurred complaints about excessive costs and poor delivery standards. Some shippers may be oblivious to the fact that for too long they have not heeded the importance of transport or how much they have been underpaying for it, but this is coming home to roost. Governments may try to regulate to ensure greater competition or guaranteed shipping for certain commodities, but if the world really does build back green, shipping is going to be disrupted further by the need to decarbonize, and fuel prices will rise along with the cost of propulsion systems.

Hope has been expressed that the world has shown it can react to an unprecedented crisis, with governments spending their way out of immediate difficulties. Ignoring the problems that may arise from stacking up debt that has to be paid off in the long term, many observers claim this proves the effort to decarbonize can be achieved. But global cooperation on vaccination has been noticeably poorer than in theory. And that may not bode well for the need to build back cleaner and greener.

Shipping’s more immediate matters include what will happen when the boxship capacity ordered during this boom hits the water and port congestion starts to clear. Is this a new pricing paradigm for container shipping, or will it slump back? Is dry bulk shipping on the verge of a new super-cycle for commodities, or will it evaporate? And what happens to tankers if the world looks to use less oil — do they have a future shipping alternative fuel? Can cruise shipping, a previously cash-rich industry, recover from its oceans of debt because of huge pent-up demand? And are remote operations and the onward march of digitalization here to stay, or will a traditionally people-centered industry want to work and play together again? Shipping’s viral strain is not over yet.

Shipyard berths for 2024 delivery of large vessels are rapidly filling up, but heady newbuilding prices are deterring buyers from fighting over the remaining slots. Brokers and yard representatives said South Korea’s big three shipbuilders — Daewoo Shipbuilding & Marine Engineering, Samsung Heavy Industries and Hyundai Heavy Industries Holdings — have now limited 2024 slots to ultra-large containerships, LNG carriers and VLCCs. Newbuilding brokers said they are still working on vessel projects that have handover dates in the first half of 2024. But they described the berths available for other orders as “thin” unless there is particularly strong demand from a multi-vessel tender.

For capesize bulkers, owners will need to look to yards in China and Japan for 2024 berth space, one said. The picture is slightly better for smaller ultramax and kamsarmax bulk tonnage and MR tankers, where slots may be available earlier. Brokers said that while the underlying demand for newbuildings is “absolutely there” — bar tanker tonnage — shipowners are less keen to book berths at current strong prices. Instead, they are turning to what is rapidly developing into a red-hot sale-and-purchase market for modern vessels and resales. Brokers said they are selling bulkers and containerships that one month later are worth 10% more. While a resale may prove pricier, it is likely to be available. “What we see today is that the discount on newbuildings is not big enough to tempt people away from secondhand ships,” one newbuilding broker said.

In past days, all eyes have been on a kamsarmax bulker resale with prompt delivery from Tsuneishi Shipbuilding in Japan. The vessel is expected to fetch between $12m and $14m more than its contract price and a premium to the $36.5m price of a newbuilding today. But those following the sale said the vessel could generate about $7m in profit if it were fixed out for a year in today’s market. Two newbuilding brokers described the situation as “frustrating”. “The market is so exciting, but you can’t get people to take a punt on a ship that comes out in 2024 based on a strong market today. That is the problem,” one broker said.

Yard chiefs indicated a reluctance to book owners into slots for 2025 delivery positions, as pricing is tricky to get right that far in advance. “There is a lot of uncertainty ahead,” one told TradeWinds. Fueling choices are also complicating orders. Recent gas price rises have prompted some owners who were considering LNG dual-fueling to re-examine the structure and pricing of bunkering contracts. One newbuilding broker is concerned that the record prices could undermine the argument for owners to use LNG as a bridging fuel to lower-carbon alternatives. Another said that AP Moller-Maersk’s move on methanol has pushed that fuel further into the spotlight. But he added: “There is no direction. We are still rudderless when it comes to fueling choices.” Other shipbrokers, however, see the fueling choice as a “convenient excuse” by some owners to press pause on their newbuilding plans.

But if shipowners do move on large vessels, can yards find space? In the past, shipbuilders have been quick to expand facilities, repositioning areas as outfitting quays to free up dock space, or even bringing in floating docks. There have been some small signs of creativity. China’s Yangzijiang Shipbuilding has reactivated its Jiangsu Yangzi Changbo Shipyard to build ultramax bulkers. South Korea’s Hanjin Heavy Industries, which has been focused on naval work, confirmed it has taken its first commercial order in seven years. There is also talk that Hyundai Heavy Industries has been looking at reopening its Gunsan yard, although this could prove politically sensitive. But shipyard chiefs point out that they have had their fingers burned in the past on expanding facilities to meet expected demand and will be cautious.

Brokers said they will want to see that current newbuilding interest is sustainable, as profit margins have not been great due to steel price rises. In addition, they said that much of the former capacity, particularly in China, is indebted and not coming back “any time soon“.

Safe Bulkers is making good on its prediction five months ago that charterers would start fixing bulkers for at least three years toward the end of 2021. The Polys Hajioannou-led owner has placed a second capesize bulker on a three-year charter since Monday, the latest being the 181,400-dwt Lake Despina (built 2014). New York-listed Safe Bulkers has fixed the vessel at $22,500 per day and will get a one-time $3m payment when the charter begins at some point between the end of January 2022 and May 2022. The undisclosed charterer has the option to extend the three-year fixture for another year at $27,500 per day.

Safe Bulkers said it expects to earn about $27.5m in revenue over the minimum scheduled three-year period of the charter. “While we remain a strong spot charter market player, we decided to lock this second three-year period time charter that further enhances the visibility of our future cash flows and supports our long-term earning capability,” president Loukas Barmparis said. The ship is currently being chartered at a 19% premium to the daily Baltic Capesize Index rate to the end of January 2022.

Safe Bulkers on Monday fixed a 181,000-dwt capesize it bought in early August for at least three years at $24,400 per day, starting in November. Charterers, which some brokers identify with agricultural firm Olam, have the option to extend the deal for a year at $26,500 per day. The company expects to make about $26.7m in revenue over the ship’s minimum three years of employment.

Chief executive Polys Hajioannou told investors in a May conference call that charterers would seek multi-year deals to employ vessels in a further improved bulker freight market. He said then that he would keep most of his company’s fleet of about 40 bulkers in the spot market in anticipation of such deals.

The Baltic Exchange’s capesize 5TC, which is a spot-rate average weighted across five key routes, came in at $86,953 per day on Thursday after picking up $83 per day since Wednesday.

A political and commercial consensus now exists to accelerate shipping’s decarbonization targets to net-zero emissions by 2050, effectively doubling the ambition of the current internationally agreed targets. But despite backing from political heavyweights to consider an immediate change to the IMO’s timeline, a formal agreement is likely to remain a matter of political aspiration until at least 2023, due to a combination of climate finance haggling and procedural ambiguity. A total of 45 member states have either formally backed net zero proposals submitted to the IMO, or indicated support for those papers in advance of a key meeting of the IMO’s MEPC meeting next month.

Meanwhile, the International Chamber of Shipping has thrown its representative weight of 80% of the global fleet behind the call to hit net zero, reinforcing the groundswell of corporate commitments that last month saw over 160 heavyweight industry leaders backing moves to decarbonize international shipping by 2050. Even among those major developing nations holding out against the politically more difficult issue of market-based measures and carbon pricing, an agreement within the IMO to set the revised target to net zero by 2050 is now widely seen as an inevitable move. Given the political influence of those governments backing the proposed revisions to the IMO strategy, and their stated support for the Paris Agreement aligned timeline, it is technically feasible that the required consensus of member states attending the next MEPC meeting in November could be reached. But it won’t be.

While a consensus over the end target of net zero by 2050 exists, that process remains linked to the planned revision of the IMO’s initial 2018 strategy to reduce greenhouse gas emissions due to be delivered in 2023. That process promises to be a divisive battle between developed and developing states still wrangling over the basics of climate finance contributions, not to mention the mechanics of market-based mechanisms and which institutions control climate cash. While next month’s MEPC77 meeting is likely to see governments signaling their support to accelerate the IMO timeline, the specific wording of statements from the floor are likely to be more ambiguous with nobody anticipating an immediate call for a revision of targets. As senior IMO insiders and IMO veterans describe it, if there is no clear indication on how climate funds will be redistributed and allocated, no developing countries will be conceding any ground on the 2050 timeline target. Rather the current crop of proposals will be aired next month in what will be tentative indicator of political ambition, then swiftly kicked into the mid-term strategy revision process where it will become part of a convoluted bargaining process between states seeking to extract concessions in return for movement on agreements and timelines. That process will conclude in 2023.

Despite the political signaling on show in the MEPC77 papers, no state is yet showing the full hand when it comes to climate negotiations. As one IMO insider described it, “they are eyeing each other up, seeing how far each of them are prepared to go. We’re not going to see much more than the broad directional strategy at MEPC77, if we’re lucky we might get some idea of where the numbers lie. MEPC is not going to save the world – it’s climate mood music”. The key submissions to next month’s MEPC77 are those backed by the US, UK, Norway, and Costa Rica and a second paper submitted by Pacific Island nations Kiribati, Marshall Islands, and Solomon Islands. The first paper proposes a revision to the initial IMO Strategy, focusing on the need to increase the ambition for emission reductions by 2030 and 2050. The submission also sees the level of ambition for 2040 as on track for the revised 2050 objective of zero total annual greenhouse gas emissions from the international shipping sector.

The Pacific islands similarly propose a resolution committing to reduce greenhouse gas emissions from shipping in line with the temperature goals set by the Paris Agreement. In the wake of both papers, states have slowly been aligning themselves with these ambitions, first via a regional agreement between 11 Asian states to back the Pacific Island proposal and voice support for a $100 carbon levy to be introduced by 2025. The fact that Bangladesh and the Philippines were among the 11 is a significant indicator that diplomacy behind the scenes is already underway. Just six months ago Bangladesh had opposed the proposal for a carbon levy inside the IMO pending further analysis while the Philippines had dismissed the paper, alongside stalwart refuseniks Russia, South Africa, and the Cook Islands on grounds of added costs for shipping. Both papers have also latterly found a unified support from the 27 European Union countries, albeit with the phrasing of “general support” to initiate a revision of the IMO strategy, suggesting that the European Commission is in no hurry to have that battle immediately.

The ICS submission to MEPC77 is similarly caveated with pragmatic context, stating that a net zero target by 2050 will only be plausible if governments take the necessary actions to achieve this. While the deadline for submissions to MEPC77 closed on October 1, states can still align themselves with papers already submitted and it is understood that the US is using its diplomatic heft to push for additional states to be added before the meeting opens. The US leadership position comes as John Kerry, US special presidential envoy for climate, is busy lining up a high-level coalition of industry first movers to help make clean technologies more affordable in the run-up to the COP26 climate summit, which will conclude just before MEPC77 starts. Several of the Global Maritime Forum’s Getting to Zero coalition are already signed up, including Maersk and Trafigura — both high-profile advocates of a more ambitious IMO strategy. While the upwards revision of net zero by 2050 now looks an inevitable when, rather than if, given the political momentum behind the proposals, those backing the revision argue that timing matters. As the European Union submissions makes clear, there are legally binding deadlines in play already. The bloc has committed to an economy-wide greenhouse gas emissions reduction target under the Paris Agreement, which has been translated into European Climate Law. This makes the EU climate objectives — of at least 55% net GHG emission reductions by 2030 below 1990 levels and climate neutrality by 2050 — legally binding for EU member States. Putting net zero targets into the IMO will allow it to filter onto statute books and that has real legal and institutional value, even if much of the political promise remains aspiration rather than tangible. It informs ministers’ day-to-day policy decisions. It also provides an explicit signal to businesses and investors across the maritime value chain that the net zero transition is non-negotiable and irreversible.

Business was a critical component of the success of the Paris Agreement, as Mr Kerry is fond of saying. He should know — he was the US Secretary of State in 2015 and played a key role in getting 195 countries to sign the agreement. Industry has taken the unique step of proactively setting out the measures that must be taken by governments to make decarbonization by 2050 a reality rather than a soundbite, argues the ICS submission to MEPC77. It remains to be seen whether Mr Kerry will be able to muster the required political support within the IMO to match that ambition.

China’s slowing property sector will hurt dry bulk demand, according to Maritime Strategies International. The London-based consultancy said that a 15% fall in steel demand from construction could lead to a 50m tonnes drop in steel use. That translates to 80m tonnes iron ore and 50m tonnes less coking coal required. Iron ore and therefore capesizes had the biggest scope to be impacted, with “significant downside risk to imports” if domestic production is supported, MSI’s senior dry bulk analyst Alex Stuart-Grumbar said on a webinar, as China accounts for over 70% of global iron ore seaborne imports.

MSI expects iron ore imports will fall by 26m tonnes, or 2.3%, this year, while coking coal has already dropped by 39% so far in 2021. Its base case scenario for capesize rates in 2022 show an average of $25,200 per day, slightly lower than the current Forward Freight Agreements contract. The trickle effect to the sub-capesize segment will also be felt through substitution. More than 2,000 panamax voyages for coal trades could be affected, equivalent to 18% of total panamax demand.

While the outlook for steel remains uncertain and is based on various outcomes, MSI expects steel imports to come under pressure, while exports could continue to be strong based on rising demand in the region. The Chinese government has imposed curbs on steel output in a bid to cut emissions, meaning that as time goes on, steel consumption and therefore demand for commodities such as iron ore and coking coal will increasingly be affected by a slowing property sector.

Other minor bulks will also be affected. Cement imports have dropped 50% to 4.9m tonnes in the last three months of this year versus the same period in 2020, following a surge through to May. “If import demand stays at these levels, there would be 300-400 fewer handysize/supra voyages per year,” Mr Stuart-Grumbar said. A similar scenario was likely to play out for logs, he added, as about 30% of log imports go into property construction with about 1,000 handysizes discharging the commodity in China per year.

The country, the world’s second-largest economy, accounts for 25% of all bulker discharges, according to MSI, and the 12% increase last year has been the cause for the build-up in congestion through 2021 given weather and coronavirus disruptions delaying unloading and loading. The logjams, which have tied up tonnage for longer, had resulted in the highest freight rates in more than a decade, but if fewer vessels get absorbed with a property market decline, that would be a negative for dry bulk, Mr Stuart-Grumbar said. An unwinding of inefficiencies in the fleet would result in weaker earnings even as cargo growth outweighed vessel supply next year, he added. The property issue has come to the fore given widespread news of debt woes, with Evergrande, one of China’s developers, expected to default on its $300bn loans or be bailed out by the state.

French container line CMA CGM could be set to reach investment grade as cash rolls in during the boxship boom. The liner operator is understood to have told investors it could potentially achieve this credit rating in the future after earnings jumped during the pandemic, according to consultancy Alphaliner. An investment grade from ratings agencies — signifying a strong capacity to meet financial commitments — is not believed to be a specific goal of the company, however.

In late July, Standard & Poor’s upgraded the company’s rating from BB- to BB, two notches off investment grade. More recently, Moody’s hiked the shipowner’s rating from B1 to Ba3, three notches off its investment grade level. The agency said CMA CGM had reduced debt, improved its liquidity, and increased the number of unencumbered assets in its fleet. While recognizing that current market conditions will not continue indefinitely, Moody’s said the owner would move forward with a more conservative fiscal policy.

CMA CGM said net profit for the second quarter hit $3.47bn, way up on the $136m in the same period last year, with more still to come. The shipowner posted earnings of $1.86bn over the whole of 2020, turning around a loss of $68m in the previous year. “The carrier has used pandemic earnings to pay down debt, while pursuing a strategy of buying secondhand tonnage rather than renewing charters,” Alphaliner said. CMA CGM has been contacted for comment.

Red-hot rates have sent containership companies’ credit ratings quickly rising this year. Lines have been making huge profits from record charter and freight rates after a strong recovery in demand, following the first waves of Covid-19 restrictions. Hamburg’s Hapag-Lloyd has achieved its highest credit ranking since coverage began in 2010. The German line has now climbed three credit notches in just over two years.

A year ago, CMA CGM addressed its debt maturity concerns with a big new bond issue. The company launched an offering of senior notes worth €525m ($616m) that will fall due in 2026. Proceeds from the sale, together with available cash on hand, were used to redeem all its outstanding €525m in 7.75% bonds that were maturing in January this year.

The Baltic Handysize Index (BHSI) is the latest metric in dry bulk shipping to meet 2008 highs in a hot sector that shows no signs of cooling off. The index, an indicator of market sentiment, hit 2,009 points after picking up 11 points on Thursday, according to Baltic Exchange data. The last time the BHSI crossed the 2,000-point threshold was on 4 September 2008. At that time, the index was in a freefall as the global financial crisis took hold and it ultimately fell as low as 284 points on 12 November 2008.

The BHSI has more than tripled since the beginning of the year, boosted by average spot rates that shot up by more than three times over the same period. The handysize 7TC, a spot-rate average weighted across seven key routes, was assessed $207 higher on Thursday to $36,616 per day. The assessment has risen every trading day since 9 September and has more than tripled since 4 January, when it was $12,040 per day.

Rising rates in the Atlantic helped buoy the basket assessment, particularly for trips from the US Gulf and north coast of South America to the European Continent and Mediterranean. The market in Asia, however, has softened during the Golden Week holiday.

On Wednesday, the Baltic Capesize Index (BCI) surpassed 10,000 points for the first time since September 2008, propelled by ever-higher average spot rates for the large bulkers. The capesize 5TC, the average spot rate weighted across five benchmark routes, is more than five times higher than it was at the turn of the year. On Thursday, the assessment gained $83 to reach $86,953 per day, having risen this year from $16,656 per day on 4 January.

Rates for panamaxes and supramaxes have also nearly tripled this year and remain at some of the highest levels in more than 10 years. The panamax 5TC assessment lost $177 on Thursday and fell to $34,953 per day, continuing the rout seen over the past week. The supramax 10TC, the average spot rate weighted over 10 key routes, was assessed $176 higher on Thursday at $37,445 per day.

As supply chain disruption continues consultants Drewry are now forecasting container shipping lines will make an “eye-watering” profit $150bn in 2021, with more to come in 2022. Earnings before interest and tax (EBIT) for container lines in Q2 far exceeded expectations and major-listed companies have upped earnings forecasts for the rest of the year.

In the second quarter Drewry estimates that EBIT topped $39.2bn an 11-fold improvement on the same period in the previous year. It noted that higher bunker and charter costs had had little impact with every carrier it tracked increasing margins compared to Q1, some by more than 50%.

Having forecast back in July that container lines combined profits could hit $100bn for 2021 as whole Drewry has now increased this EBIT forecast to what it describes as an “eye-watering” $150bn. Significantly looking at 2022 it says EBIT for lines “could be slightly more again”.

“To seasoned observers of the container market, typing these numbers on a page is frankly surreal,” the analyst commented in a Container Insight report. Container vessel supply lags demand until 2023 with port handling expected to increase 8.2% this year and 5.2% in 2022.

Looking at freight rates Drewry said: ”Stronger than expected spot rate movement in 3Q21 and a longer supply chain recovery timeline are behind our reason to upgrade the outlook for average global freight rates (spot and contract) for 2021 to 126%, which is an upward adjustment from 47% in our June forecast. For 2022, spot rates are expected to decline, but there will be a significant increase in contract pricing, leading to an increase in average global pricing of about 6%.”

Cape rates continue to push higher, even if FFA traders took some fright over the past 24 hours. The Baltic Exchange’s capesize index went above 10,000 points for the first time in more than 13 years yesterday as port congestion and heightened demand for swift shipments of iron ore and coal pushed the index up 7.4%. Average daily earnings for capesizes have now doubled in the space of a month to stand at above $86,000 a day with some voyages this week reported more than $110,000 a day, rekindling memories of dry bulk’s last great bull run from 2003 to 2008.

“The massive push has come from an impressive increase in the Atlantic basin and backhaul segment. This is highly correlated with the massive backwardation in FFA curve encouraging owners to seek longer duration as the forward market is showing a lack of confidence,” Norwegian broker Fearnleys stated in its most recent weekly report.

“It is supposed to be Golden Week, but some people must be working the phone like crazy,” analysts at Lorentzen & Stemoco suggested in a daily update this morning pointing towards Chinese iron ore imports, with the C3 between Tubarao to Qingdao rising by over $2 per ton yesterday and the C5 between West Australia to Qingdao up by almost a dollar per ton.

Data from Signal Ocean shows the number of capesize vessels sailing in ballast dropped to less than 80 ships in the first days of October compared to 138 vessels at the beginning of July.

“The current trend in the availability of capesize ships for sailing in ballast to load reveals that rates may go even higher if the shortage of supply persists week by week,” commented Maria Bertzeletou, a market analyst with Signal Ocean.

According to Xinhua, China State Railway Group has started maintenance on a key coal transport line in northern China to ensure stable deliveries during the winter, effectively limiting transport volumes to one million tonnes between 4 October and 28 October. Industry sources states that the rail line delivered more than 100m tonnes of coal between July and September to meet peak summer demand.

In our view, volume shortfall should be limited but would ensure incremental seaborne coal cargoes – which on a tonne-mile basis would be amplified by current congestion in Chinese ports. The situation adds to the fact that both China and India are struggling with menacingly low coal stocks headed into the winter.