Whether its LNG, dry bulk, containers, car carriers, tankers or shipbuilders, the extreme power shortages being experienced in China now are affecting almost every strand of shipping. Two thirds of China’s provinces have been forced to implement electricity-rationing measures for the past fortnight as the nation faces up to a severe coal shortage. Factory closures are expected to have sizeable impacts on the volumes of container exports in the coming months.

Official data released this week showed China’s factory activity contracted in September for the first time since February 2020 when China first contended with the spread of Covid-19. Since last week, more than 100 companies from electronic component manufacturers to gold miners have notified stock markets of production suspensions. One of the worst affected provinces is Jiangsu, where the major cities of Kunshan and Suzhou are home to key clusters in the electronics, chipmaking and textile industries

The China Coal Industry Association warned this week it was “not optimistic” about supplies ahead of winter, the peak season for demand. The government has said its priority will be to guarantee household power and heating supplies over the winter, as state-run energy firm Sinopec pledged to boost imports of liquefied natural gas. However, Citi analysts said in a note they expected power shortages to persist in the peak winter season for heating, most of it coal fired.

Shipbuilding sources in China have told Splash this week that the power shortages are likely to hamper delivery schedules in the coming months. Commodore Research stated in a recent note that China’s reliance on thermal coal has continued to grow. So far this year, thermal coal-derived electricity generation has contributed to 72.1% of China’s total electricity generation. During the same period last year, it contributed 71.3% of total electricity generation.

The extreme demand for coal, combined with strong iron ore imports, have pushed dry bulk rates – particularly for capesizes – back to the territory they enjoyed in their glory days of 2007 and 2008, aided by big port congestion. Cape queues in China today are 117% higher than the five-year average, according to Braemar ACM.

China put a ban on Australian coal last year, which pushed up the ton-mile scenario for dry bulk a great deal, as the world’s most populous nation sought coal from all the corners of the planet to replace its Australian source. There is now speculation that as panic sets in in Beijing, the Chinese government might have to make a policy U-turn on its Australian ban. Other Australian commodities have seen a resurgence in the People’s Republic of late. China is snapping up cargoes of Australian wheat despite a bitter trade standoff between the two countries, as crop downgrades elsewhere lead to a global shortfall in output. The buying spree comes as Australia, a key global food supplier, is expecting a second consecutive bumper harvest, while Northern Hemisphere producers have been hit by adverse weather and drought. It’s not just China that experiencing an energy crisis. In the US, the Hurricane Ida dealt a blow to oil and gas production in the Gulf Coast, while in Europe, shortages of natural gas have led to soaring costs.

Analysts at Lorentzen & Stemoco have identified five factors all at work, causing what the Norwegian broker described today as the worst global energy crisis in a decade. “First, demand is rebounding solidly after Covid-19, as requirements from industry and consumers are returning to pre-pandemic levels,” analysts at Lorentzen & Stemoco noted in an update to clients today. “Second, investment in the energy sector has been underfunded for years, both by corporations and states. Third, the shift towards more renewable energy types such as wind and solar has left a vacuum exacerbating the deficit. Fourth, climate change is causing supply destruction and extreme changes in demand. And finally, political relations have been altered between the haves and have-nots.”

Target, the eighth largest retailer in the US, is the latest shipper to charter in its own tonnage in the ongoing battle to keep its shelves stocked amid this year’s desperate supply chain situation. “As co-managers of the ship, we can avoid delays from additional stops and steer clear of particularly backed-up ports,” Target said, without revealing who it is working with and the size of the vessel.

Big retail brands including Walmart, Costco, Home Depot, and Ikea have gone down a similar vessel chartering path in recent months as port congestion has worsened and liner schedule reliability has sunk to record lows where less than one in three boxships are arriving on time.

The Chinese order to secure supplies at all costs has highly positive implications for the dry bulk market as well.

With power outages no longer being tolerated, Chinese coal imports are set to increase going forward (at least highly likely).

According to IEA, China’s total thermal coal demand is ~3.1bn tons (~2.3bn for electricity and heat and ~0.7bn for non-power), however, with only ~240m tons of imports, imports are only serving ~8% of total thermal coal demand. As such, if demand increases by 1%, imports should increase by as much as ~13%, assuming that all incremental demand is served by imports. Similarly, a 2% increase in demand, would imply ~26% increase in imports. To put that further into perspective, total seaborne coal trade is about 1.3bn tons. As such, a 1% and 2% increase in Chinese demand (once again assuming that incremental demand is served by imports), would imply a ~2-5% increase in seaborne trade (all else equal).

Booming spot rates for capesize bulkers may prompt charterers to start using panamaxes as a cheaper alternative to carry commodities, according to brokers. The capesize 5TC, a spot-rate average weighted across five key routes, on Thursday came in at $74,176 per day after losing $610 per day, according to Baltic Exchange data. The panamax 5TC, by comparison, reached $36,119 per day after shedding $216 per day.

Instances of charterers hiring two panamaxes instead of one capesize are “still limited” despite the rate disparity, according to Derek Langston, head of research at UK-based brokerage house Simpson Spence Young. “In addition, the Atlantic basin feels over-tonnaged in the panamax sector, so limiting the upside in the immediate term,” he told TradeWinds. “The Pacific provides the main upside potential for panamaxes with stem splitting starting to appear at the end of September.”

Chiba Shipping has fixed the 84,790-dwt MG Kronos (built 2016) to Cobelfret at $40,000 per day for a 2 October voyage from China to South Korea via New Zealand with the intention to carry coal. Brokers said they are not aware of capesize stems being split into panamaxes yet, but the idea is getting thrown around in the market. “It’s also worth noting that besides the economic calculations, the logistics of what cargo sizes receiving terminals are prepared for and expecting can also be an issue,” one broker said.

Spot rates for capesizes have climbed steadily from $40,518 per day on 8 September to levels not seen in many years amid high demand and tight supply exacerbated by port congestion. More than 2,400 bulkers — 21% of the global fleet — are at anchorage awaiting berths worldwide, according to VesselsValue. “Demand for commodities has surged post-Covid as economies invest in growth and infrastructure, and the use of iron ore and coal are required for steel production,” it said. Port congestion is “especially high” around Chinese import hubs, such as Shanghai, Qingdao, and Tianjin, VesselsValue added. “A quarter of all congested bulkers are concentrated in the East China Sea and Yellow Sea regions, waiting to discharge their cargoes.”

China’s plan to moderately increase coal imports to meet its heightened demand this winter have raised questions on how long it can sustain its ban on coal shipments from Australia. The world largest coal consumer has been facing a severe power supply crisis, with more than half of the country enduring power cuts as the nation comes to grips with a litany of issues, ranging from depleted coal inventories to mine shutdowns, international trade wars to far-reaching consequences of its national energy policy. The power crunch has been complicated by Beijing’s decision last year to ban imports from Australia, the world’s second-biggest exporter.

China’s top economic planner, the National Development and Reform Commission, said this week it would “take multiple measures to strengthen the adjustment of supply and demand” of electricity and stressed on imports to meet the rising demand for the raw material. It means China will increase purchases from traditional sources and turn to imports from other sources such as South Africa, Colombia, the US and Canada. But will Beijing feel extra pressure to lift the Australian coal ban?

The talks come as Australian coal in Chinese ports, which has not been cleared by customs, is no longer being offered for reshipment as there are rumors that the raw material is expected to be allowed for unloading into ports amid tightness in coal supply. Coal still accounts for two-thirds of power generation in China with nine-tenths of the country’s coal being sourced domestically from Shanxi, Shaanxi, and Inner Mongolia. The nation has built wind and hydropower facilities, but the output of these renewables has been insufficient to meet recent demand.

Before Australia called in for an independent inquiry into the origins of coronavirus last year, it shipped around 68% of China’s coal imports. That plunged by almost 98% in the first eight months of this year, to just 3 MMT compared with 63 MMT in the same period last year as China imposed an unofficial embargo on Australian coal as part of their diplomatic standoff, refusing customs clearance. At the same time, imports from Indonesia increased by just 23 MMT, and from Russia by 7 MMT. The net result is that overall coal imports into China in the first eight months of 2021 were down by 7.8% year on year, Banchero Costa data shows. Its head of research Ralph Leszczynski believes the government may be forced into easing the ban on Australian coal soon, as that would allow more coal to be imported and ease some pressure on domestic coal prices.

Depleted coal stocks have raised prices to a 10-year high with stem coal prices at around $190 per tonne, compared with $90 a tonne about a year ago. Mr. Leszczynski said this is creating a significant headache for Chinese power plants. “Their problem is that they need to buy coal at market prices but can only sell electricity at prices capped by the government. Therefore, power plants have little incentive to significantly boost electricity generation, unless the government agrees to increase electricity prices for users, or something is done to lower coal prices.” However, the state economic planning agency said yesterday that it will let power prices reasonably reflect changes in demand, supply and costs.

If lifting the ban on Australian coal shipments is a step too far for the Chinese leadership, there are other but limited options, said Ocean Analytics founder Ulf Bergman. “For shipping, the preferred option would be increasing purchases from the more distant shores, increasing the ton-mile demand.” But beyond the US, it may not be achievable in the short term because of the pandemic. “Hence, it leaves the Australian alternative,” Mr Bergman agrees. “Any lifting of the ban, either temporary or permanent, would benefit the capesize segment, which accounted for approximately two thirds of the shipments from Australia.” Since the introduction of the ban, panamaxes have become increasingly dominant in the Chinese coal trade.

Rates for capesize bulkers on transpacific roundtrips plummeted on Thursday, halting the bull run in the Baltic Capesize Index that has been ongoing since late last week. Spot rates on the China-Japan transpacific round-trip (C10) between South America and Asia were assessed 6.6% lower on Thursday at $77,723 per day, according to Baltic Exchange data. By comparison, the benchmark round-voyage from China via Brazil lost only $159 per day to come in at $64,255 per day.

“It was the C10 that was the only weak part of the index, but one should bear in mind that this particular route has been the strongest and even now it is some $13,000 above the Brazil-China roundtrip,” John Kartsonas, founder of asset-management advisory firm Breakwave Advisors, told TradeWinds. “Eventually some normalization will take place, and for now it is in the form of a marginally weakening Pacific market.”

He said Thursday’s dip in the transpacific rate assessment is not yet meaningful, amid instability caused by cyclone disruptions and a volatile iron-ore market. “Also, the futures market is at a steep discount to spot, so the expectation is that we will see a meaningful drop in the spot [market] in the next couple of weeks,” he said. “So, something’s gotta give; either spot rates drop towards futures, or the opposite takes place.”

The Baltic Exchange’s basket assessment of average capesize spot rates declined on Thursday, dragged down by the transpacific round-trip, which accounts for 25% of the calculation. The capesize 5TC, the weighted-average spot rate across five key routes, fell by $610 to $74,176 per day. The assessment climbed by 22% between last Friday and Wednesday.

In contrast to the Pacific, rates in the Atlantic basin continue to strengthen on the back of short vessel supply. The benchmark rate for transatlantic round voyages from Gibraltar/Hamburg was assessed $2,350 higher on Thursday at $81,800 per day.

In derivatives, paper remains heavily discounted relative to the current capesize spot market, particularly for prompt contracts. Capesize forward freight agreements (FFAs) for September picked up $236 per day on Wednesday and settled at $54,257 per day, Baltic Exchange data showed. The October contract jumped by $875 per day to $61,286 per day on Wednesday.

Chartering giant Cargill has warned that shipping’s emissions are rising again as sectors such as containerships and bulkers prosper. With so many cargo orders on the books, the boxship fleet is speeding up and consuming more bunkers, warned Cargill’s president of ocean transportation, Jan Dieleman.

“Global trade is growing and that means emissions will come up from transport,” he told Bloomberg. “[The] container fleet is speeding up, so emissions from that sector are going to be up, not down.”

At any one time, Cargill is chartering more than 600 ships. Dieleman said Western ports are facing congestion due to Covid-19-related worker shortages. He added that this is delaying the loading and unloading of containers, creating a shortage, and forcing some companies to resort to shipping in bulk what they would normally “stuff into containers“.

As for shipping’s decarbonization efforts through the International Maritime Organization, Dieleman said: “To some extent, it would be great if it’s all regulated globally.” But he added that this will not proceed quickly enough.

Dieleman said he cannot see why “certain jurisdictions” such as the European Union should not be allowed to pursue their own decarbonization measures more aggressively. He also said there could be a crunch in bulker capacity in future years, with little ordering of new ships seen in the sector.

He said questions of future technology and finance are holding owners back. “If you take a little bit of growth in global trade going forward and the number of ships coming to the water, you have a pretty constructive picture,” he said.

When supply of capesize tonnage ran short in the Atlantic and Pacific basins last week, spot rates and freight derivatives shot for the moon — and have kept going. Average capesize spot rates have advanced by 25% over the past week and forward freight agreements (FFAs) for October are trading about 32% higher than last Wednesday. In the physical market, China has been topping up its iron ore and coal stockpiles ahead of a week-long public holiday in early October.

Vessel demand is coming up against tight supply of tonnage across both basins, emboldening shipowners to offer higher freight prices and setting the FFA market on fire. But thoughts are now turning to if — and when — this extraordinary bull run in freight derivatives will come off. “Cape front-end contracts have exploded to the upside, as the physical market is tighter than a crab’s ass,” said one FFA trader, who did not wish to be named. “It could absolutely keep going, but when it pulls back it will be absolutely brutal.” (Khalid – no matter how strong markets are, everyone is constantly searching for a reason for its collapse.  Weird.)

The trader said the market could slow soon as people adjust their risk. “Cal 22 [paper for the calendar year 2022] is looking cheap, but let’s not forget that the Chinese property sector — 40% of steel demand — isn’t looking so solid these days. We are heading into month-end, quarter-end and the Chinese are off next week. If there is any time to take a few chips off the table, it’s now,” the trader said.

TradeWinds spoke to a Dubai-based FFA trader who was also mindful of the backwardated market. “During the time you spend discussing the Fe [iron] content of Chinese stockpiles, the market has gapped [up by] $4,000,” he said of rabid buying activity in the market this week. “There’s no time to figure out why if you haven’t already, but considering the market is pricing a 65% drop into Q1 [next year] there will be bodies left somewhere,” he added. Prompt contracts leapt up on Monday, kept going on Tuesday and growth continued apace on Wednesday. Bids for October contracts were at $63,000 per day as of 12.30pm in London (11.30am GMT) on Wednesday, up by more than $2,540 on the day’s opening price. The contract has risen by about $12,400 or 24% since Friday’s close, based on current bidding.

In contrast, paper for the calendar year 2022 has not moved much. The contract settled $574 higher on Tuesday at $27,295 per day and bids during trading on Wednesday were slightly below this number.

Wednesday was another good day for the physical market. Baltic Exchange panelists added an extra $5,773 to the capesize 5TC assessment, the weighted average of spot rates on five key routes, which was assessed at $74,786 per day. This is the assessment’s highest level since December 2009, driven by consistent demand for iron ore and coal trips.

On Tuesday, Rio Tinto reportedly booked a capesize for an ore voyage to China from Dampier, Western Australia, at $21.80 per tonne, loading from 15 October. A week earlier, the mining giant booked a vessel for the same voyage at $16.95 per tonne for loading dates commencing on 5 October.

Heading into the peak season, with capesize freight rates becoming ever more volatile, being at the right place for the right fixture is crucial. Spot rates out of Western Australia are the driver this time, breaking the $20 a tonne glass ceiling, up from $12.5 a tonne a fortnight earlier. At the same time, the more relevant bellwether for the entire market seems to be facing some obstacles, not enjoying the same upside from Chinese port congestion apparently as the capes.

Knowing a rally when you see it is one thing. Finding out what caused it is a completely different matter. Surely the mighty buying power of China is behind the present lift of freight rates. But shipbrokers who claim that they called the 2021 rally long before it unfolded are barely more than lucky braggarts. While Splash Extra has the deepest respect for those who took a chance and got lucky, those who knew it all in hindsight when the market finally went up after multiple failed calls do not deserve much respect in that regard.

Regular readers of Splash Extra will also know that we still see this market as surprisingly strong as we recognize all the temporary support factors underpinning the current market remains intact as we enter the final three months of 2021.

Will the debt crisis of China’s Evergrande Group, a massive property developer, prove to be the Waterloo of the dry bulk market? Splash Extra believes that the event is a symptom of current Chinese policies, signaling that the housing market is now past its peak, and this is going to impact dry bulk shipping for years to come.

In the short term, it’s more relevant to focus on iron ore imports that stay strong as you see through the mirage of Chinese iron ore imports in June to October last year. During those five months, a total of 530m tonnes were imported. This means that monthly year-on-year volume growth rates for those months will be negative in 2021, while imports are in fact strong. Splash Extra expects the same pattern to be noted for soybeans, whereas Chinese coal imports are just a different game, mostly impacted by phony import data and geopolitics.

It was the national sport of shipping over the summer, guessing who had taken containers onboard for a bulker voyage. Quite a few rumors circulated, including some where the bulker all but capsized. Genco Shipping is among the first officially confirmed, and most importantly it has a proper class approval to carry containers on deck as well as in cargo holds. An estimated 1,300 teu can be carried by a capesize whereas an ultramax can take up to 700 teu. Do it right if you are listed, don’t do it at all if you are not approved to do it, though the money must have been attractive if an owner were risking his/her ship, let alone the crew.

While wasting too much time down a social media rabbit hole the other day I came across the best line about shipping that I’ve heard for a long, long time.

A LinkedIn connection relayed how his father always said that when shipowners start explaining to the world how great shipping markets work and begin predicting extended booms, it’s time to run for the hills because they have already run to the yards. “They are the most suicidal individuals on Earth,” the Norwegian commented.

It is often indeed the case that shipowners do shoot themselves in the foot, however this time round – at least on the dry bulk front – there is little of the hubris you had the last time the market fired up in the first decade of the century.

There is still so much caution out there, everyone looking for the whole thing to go wrong. The last brutal decade for bulk earnings has changed temperaments.

You just need to look at the period to spot spreads in bulk, it tells you all you need to know. Period charters are being done at big discounts to spot rates, almost historically large spreads.

There is clear caution among the big industrial carriers about where the markets are heading. It’ll likely to take through to Q2 next year for that caution to dissipate, and that will be the moment where the market begins to become dangerous.