China’s coal-fired power plants are facing procurement challenges for coal due to tight domestic supply, high prices, disruptions in shipping and strong electricity demand, the China Electricity Council (CEC) said in a report dated 27 Sept ’21.

The CEC has thus advised plants to build inventory to ease the situation as electricity rationing by several Chinese provinces has taken place the recent weeks whilst seeing power outages in some cities, as utilities tried to conserve fuel stocks and manage demand-supply imbalances.

Chinese electricity consumption rose 13.8% over Jan-Aug, versus an 11.3% industrial power generation increase during the same period.

Translated into the dry bulk market, the Supramax FFA for Oct ’21 currently stands at USD ~38.8k/d.

The power crunch in China appears to have a broad implication for the shipping sector. The electricity squeeze has led at least 10 Chinese provinces, including some manufacturing hubs, to suspend factory productions and even household utilities in the past weeks. The reason for this has mixed the country’s stricter emission rules and soaring coal prices. The record high price of thermal coal, the use of which accounts for about two-thirds of China’s power generation, has made local power plants reluctant to ramp up output. As domestic electricity price is capped by the government, the more they produce now the more they will lose.

China’s tension with Australia, the world’s second-largest coal exporter, has certainly contributed to the situation. Although Beijing has increased the imports from other countries, such as Indonesia and Mongolia, after an unofficial ban on Australian coal last year, it has failed to fill up the gap — especially amid a surge in demand driven by a strong economic recovery this year. The demand for energy is expected to rise further as the winter peak season approaches. China will need to import more coal. That has fueled the expectation that the restrictions on Australian exports may be relaxed, which could change the trade patterns of many panamax dry bulkers. “I believe that soon the government might be forced into easing the ban on Australian coal, as that would allow more coal to be imported and ease some pressure on domestic coal prices,” said Banchero Costa head of research Ralph Leszczynski.

Meanwhile, the closed factories — including aluminum smelters, food processers and electronic component makers — are compounding concerns over a turn of the current container shipping super cycle. Freight rate index from the Shanghai Shipping Exchange have already shown signs of stalling ahead of the Chinese Golden Week holiday in October. In the real market, spot rates offered on China-US west coast trade has tanked to around $10,000 per feu from $15,000 per feu in early September, according to a Shanghai-based forwarder. With the halt of factory activities shipments are being delayed, putting pressure on cargo demand, the person explained. “And some scalper agents are dumping the slots they have been hoarding before the Golden Week in fear of a sharp correction of an already inflated freight market.”

Volumes were already slowing down because of the October holidays and the end of Christmas and New Year cargo cut offs, said Liner Research Services analyst Hua Joo Tan. “The middle of October will be a key test if the rates will hold,” said Mr Tan. “Although the headlines are all about the long queue of ships at Los Angeles, this is less important than the actual demand out of China.” The factory shutdowns could put another dent on the demand side, at least temporarily, he added. However, the oil shipping markets — at least investors of tanker companies — seems to have been perked up by the Chinese power crisis. The share prices of Shanghai and Hong Kong-listed Cosco Shipping Energy Transport surged 10% and 16%, respectively, on Tuesday. Chinese power plants do not use crude oil in any form for power generation these days. But the headlines about the blackouts and suspended assembly lines became as an important reminder or catalyst to investors, according to Shanghai-based SWS Securities analyst Yan Hai i.e., energy is in short supply and the production as well as trading for oil, a key part of it, will have to increase. “So, the market thinks of the tanker companies, which are in the bottom of the cycle and bound to benefit [from the trade recovery],” said Mr Yan.

In addition, some factories might decide to install and use private diesel-fuel generators to provide electricity to continue operations should they expect the disruption of power supply to last, Mr Leszczynski added. “We have seen this happen in previous periods of power shortages and is the norm in countries with chronically unreliable energy grids, such as Myanmar.” This would give a boost to clean products imports before the momentum moves to crude oil, he said. But it will all depend on whether the crunch in China is “a short-term blip or to run for longer”.

The freight derivatives for capesize bulk carriers is on fire as spot rates in the physical market near $70,000 per day. Greg McAndrew, executive director of derivatives at shipbroker Simpson Spence Young (SSY), said the rally in the market for freight forward agreements (FFAs) comes as a direct result of what is happening in the physical market. “The latest large move up started in the middle of last week, when both physical basins firmed physically. This combined with congestion issues was enough to spark a rally in FFA,” he told TradeWinds. “In turn, those that were short the market had to stop out, pushing the FFA market higher.”

Prompt contracts leapt up on Monday and kept going on Tuesday. Bids for October contracts were at $60,000 per day as of 3.30pm in London (1430 GMT), up by $4,500 since the market opened. The contract has risen by around $9,500 since Friday’s close, based on current bidding. Fourth-quarter contracts traded at $50,500 per day mid-afternoon in London, after closing on Monday at $46,702 per day. McAndrew thinks the derivatives market has potential to go even higher. “The [forward] curve is also in steep backwardation, notably from December onwards,” he continued. “Some of this has been eroded in the last two days of trading, but if the [Baltic Capesize] index remains at these levels or pushes further, (which seems likely) then further gains are likely on the FFA curve.”

Implied freight rates for each quarter next year are all above $24,000 per day, based on settlements on Monday. Bidding was over $25,000 on Tuesday for first quarter and second quarter FFAs. Derivatives specialist Freight Investor Services said in a market report that contracts for next year “lifted significantly as good volume changed hands” on Monday. Paper for the calendar year 2022 settled $1,153 higher on Monday at $26,721 per day.

Average capesize spot rates have reached their highest level since December 2009. Baltic Exchange panelists added an extra $5,983 to the capesize 5TC assessment, the weighted average of spot rates on five key routes, which was assessed at $69,013 per day on Tuesday. Available tonnage is short in both the Atlantic and Pacific basins due to ongoing port congestion, especially in China, weather-related disruption, and changes in trade flows for commodities like coal.

Rates in the Atlantic are holding steady as owners prefer to keep their ships in the Pacific instead of ballasting west of Singapore, according to a FIS’s daily market report on Tuesday. “The Pacific market saw healthy coal shipping volumes coming from South Korean trade participants, though there were some market concerns over iron ore demand after the Golden week holidays in China,” FIS said in its report. Demand for iron ore is being kept firm by restocking activity in China.

A massive $4 was added to the Baltic Exchange’s Brazil-China benchmark iron-ore voyage on Tuesday, which was assessed at $43.20 per tonne. There was word in the market that a Chinese-controlled capesize was fixed at $44.80 per tonne, FIS said on Monday.

The rival Western Australia-China benchmark route was assessed $2.25 higher at $21.818 per tonne.

The power crunch in China appears to have a broad implication for the shipping sector. The electricity squeeze has led at least 10 Chinese provinces, including some manufacturing hubs, to suspend factory productions and even household utilities in the past weeks. The reason for this has mixed the country’s stricter emission rules and soaring coal prices. The record high price of thermal coal, the use of which accounts for about two-thirds of China’s power generation, has made local power plants reluctant to ramp up output. As domestic electricity price is capped by the government, the more they produce now the more they will lose.

China’s tension with Australia, the world’s second-largest coal exporter, has certainly contributed to the situation. Although Beijing has increased the imports from other countries, such as Indonesia and Mongolia, after an unofficial ban on Australian coal last year, it has failed to fill up the gap — especially amid a surge in demand driven by a strong economic recovery this year. The demand for energy is expected to rise further as the winter peak season approaches. China will need to import more coal. That has fueled the expectation that the restrictions on Australian exports may be relaxed, which could change the trade patterns of many panamax dry bulkers. “I believe that soon the government might be forced into easing the ban on Australian coal, as that would allow more coal to be imported and ease some pressure on domestic coal prices,” said Banchero Costa head of research Ralph Leszczynski.

Meanwhile, the closed factories — including aluminum smelters, food processers and electronic component makers — are compounding concerns over a turn of the current container shipping super cycle. Freight rate index from the Shanghai Shipping Exchange have already shown signs of stalling ahead of the Chinese Golden Week holiday in October. In the real market, spot rates offered on China-US west coast trade has tanked to around $10,000 per feu from $15,000 per feu in early September, according to a Shanghai-based forwarder. With the halt of factory activities shipments are being delayed, putting pressure on cargo demand, the person explained. “And some scalper agents are dumping the slots they have been hoarding before the Golden Week in fear of a sharp correction of an already inflated freight market.”

Volumes were already slowing down because of the October holidays and the end of Christmas and New Year cargo cut offs, said Liner Research Services analyst Hua Joo Tan. “The middle of October will be a key test if the rates will hold,” said Mr Tan. “Although the headlines are all about the long queue of ships at Los Angeles, this is less important than the actual demand out of China.” The factory shutdowns could put another dent on the demand side, at least temporarily, he added. However, the oil shipping markets — at least investors of tanker companies — seems to have been perked up by the Chinese power crisis. The share prices of Shanghai and Hong Kong-listed Cosco Shipping Energy Transport surged 10% and 16%, respectively, on Tuesday. Chinese power plants do not use crude oil in any form for power generation these days. But the headlines about the blackouts and suspended assembly lines became as an important reminder or catalyst to investors, according to Shanghai-based SWS Securities analyst Yan Hai i.e., energy is in short supply and the production as well as trading for oil, a key part of it, will have to increase. “So, the market thinks of the tanker companies, which are in the bottom of the cycle and bound to benefit [from the trade recovery],” said Mr Yan.

In addition, some factories might decide to install and use private diesel-fuel generators to provide electricity to continue operations should they expect the disruption of power supply to last, Mr Leszczynski added. “We have seen this happen in previous periods of power shortages and is the norm in countries with chronically unreliable energy grids, such as Myanmar.” This would give a boost to clean products imports before the momentum moves to crude oil, he said. But it will all depend on whether the crunch in China is “a short-term blip or to run for longer”.

Total iron ore loadings in the first 8 months of 2021 were up +2.1% y-o-y to 1027.8 MMT. This was higher than the 997.2 MMT in the first 8 months of 2019 that was affected by the Brumadinho dam disaster. However, it was a little less than the previous record 1028.7 MMT in the first 8 months of 2018.

In ton-miles, trade has massively shifted in favor of long-haul shipments from Brazil to Asia. Total iron ore shipments from Australia declined by -0.6% y-o-y in the first 8 months of 2021, to 580.7 MMT. Total shipments from Brazil surged by +10.7% y-o-y to 228.0 MMT. This is, however, still below the pre- Brumadinho level of 249.8 MMT in Jan-Aug 2018.

Brazil now accounts for 22.2% of global iron ore shipments, after Australia’s 56.5%.

Wholesaler Costco, the fifth largest retailer in the world, has emerged as the latest American brand on the high street to attempt to take shipping matters into its own hands. Costco has revealed it has chartered in three ships and rented thousands of containers to shift around 20% of its Asian imports over the coming 12 months. The ships range in size from 800 to 1,000 teu in capacity.

Costco joins a host of other big retail brands such as Ikea, Walmart, and Home Depot in chartering ships to battle this year’s supply chain crunch.

Freightos data shows China-US end-to-end ocean shipments took an average of 73 days so far in September, 83% longer than in September 2019.

“Durations like those mean that, with the holidays rapidly approaching, goods that don’t ship soon may not make it in time,” Judah Levine, head of research at Freightos, warned last week.

Bulker owners believe in a promising future given the low supply growth which should be kept in check for two more years at least. Speaking on a recent Arctic Securities’ webinar, the owners from five companies said strong demand will continue to outpace the supply side leading to a healthy scenario for freight rates. 2020 Bulkers chief executive Magnus Halvorsen said deliveries of new vessels will drop to 10m dwt next year from an expected 18m dwt this year. That compares with 25m dwt delivered in 2020. On the demand side, the biggest surprise has come from the coal market, with export volumes rising by 7% year on year, despite the focus on environmental concerns, he said.

Tonne-miles have similarly increased as China sources more product from the US and Atlantic basin, while Australia ships more to Europe because of trade tensions with China. In addition, more coal was being sourced for power plants given the high gas prices being experienced. Mr Halvorsen said it was a “healthy supply-demand picture” that was driving the strength in rates, rather than a congestion-led rally. Given the bullish stance, the forward curve was “mispriced” for next year and 2023, he said.

The higher demand could be seen most acutely in spring when vessels were operating at full speeds, according to Belships chief executive Lars Christian Skarsgård, who agreed with the 2020 Bulkers’ chief executive. Every additional one knot increase in speed led to a rise of 5%-8% in tonnage supply. He noted that the infrastructure boom was not just a China-story with “enormous demand for cement and rebar steel, among other commodities, from the emerging market, for example for offshore wind installations”.

The market is moving from a demand story to a supply story, said Golden Ocean chief executive Ulrik Andersen. Even if stimuli may taper off, demand will still outweigh supply growth, in part due to looming regulations, and there will be little change before 2024 because of yard capacity constraints for newbuildings. Mr Andersen is looking to shed older tonnage as secondhand values increase. He expects vessels older than 10 years to face problems going forward.

Thanks to muted ordering at present, the supply side looks “attractive”, said Star Bulk senior vice-president Herman Billung, despite there always being a black swan event like the recent news about Evergrande, China’s largest property developer, likely defaulting, which dominated headlines around the world. The executives said they were not too worried about the fallout impact as any potential slowdown in China will be offset by rising demand from the rest of the world. For example, steel production globally, excluding China, is pegged at 10% growth this year, at a time when China’s output gain is estimated at 3%-4%.

Even if construction were to fall by 10%, the impact on dry bulk demand would be 1%, according to Mr Halvorsen. “For China to be a problem, we would need to see a slowdown in other areas too.” The Winter Olympics in Beijing early next year may help support rates, and even as iron ore prices have dropped by half to the $100 per tonne level, steel prices have held up, and even with the lower iron ore prices, miners can still make a tidy profit, with production costs of around $15 per tonne.

However, the property sector issue is “one to watch”, said Klaveness Combination Carriers head Engebret Dahm, who also expects low ordering until about 2023. He expects strength in dry bulk rates to continue next year, and combined with a recovery in the tanker market, should be “as close to nirvana” as one can get.

The surge of newbuilding activity that started in the fourth quarter of 2020 is likely to tail off as fears emerge of a capacity glut when those orders enter service. “Spectacular container shipping market conditions and extremely strong sentiment have seen a record breaking boxship investment surge,” Clarksons said. “Newbuilding contracting in the year to the end of September 2021 has exceeded all previous annual contracting records in teu terms.” By late September, 468 units comprising 3.9m teu had been ordered, exceeding the previous full year record of 2007, when 3.3m teu was ordered.

Figures from Clarksons now put the containership orderbook at 5.6m teu at the end of the third quarter, up 185% year on year and more than double where it stood at the start of this year. “At 23% of fleet capacity, the orderbook was at its highest proportion since April 2014, though still moderate in the context of the period 2000-2009.” In 2008, the orderbook peaked at 61% of the existing fleet. While the orderbook was dominated by larger vessels, which accounted for 75% of capacity on order, recent contracting had also shown an uptick in demand for smaller, more flexible tonnage, the analyst said.

Recent contracting had pushed up the number of vessels in the 12,000 teu-16,000 teu size range on order, while the number of midsize units had risen to 89, comprising 600,000 teu by the end of September, and now accounts for 10% of the orderbook. “Charter owners and operator owners have both been active in the containership newbuilding surge,” Clarksons said. “In the period between the start of the fourth quarter of 2020 and the end of the third quarter of 2021, 48% of the contracted capacity was ordered by charter owners and 52% by operator owners.” In the 12,000 teu-16,999 teu segment, 46% had been contracted by charter owners and 54% by operator owners.  For the 4,000 teu-7,999 teu segment there had been “notable interest” from charter owners, with 60% of the contracted capacity since September 2020 in this category ordered by a charter owner.

The orderbook also reflected increasing interest in alternative fuels and environmental technology, said Clarksons. “While there is no clear consensus on technology or fuel choice, LNG dual-fueled containerships remain a popular option for containership owners, with 57 LNG-capable units of 700,000 teu contracted in 2021 to the end of September, taking the LNG capable orderbook to 85 units of 1.2m teu.” This accounted for almost one fifth of capacity ordered this year, it added. Nevertheless, scrubber-fitted vessels were still a popular choice among owners, accounting for just under half of capacity contracted by the end of September.

Clarksons warned, however, that the past year’s boom in containership ordering may now be coming towards an end in the face of concerns regarding overcapacity. “Against the backdrop of a record-breaking surge in orderbook capacity, material supply side pressure from 2023 is now widely expected. At 2.2m teu, the current 2023 orderbook delivery schedule is equivalent to 8.6% of the 2023 fleet. 2024 will also see significant containership capacity delivered, with 1.9m teu scheduled for delivery, as at the end of September 2021.”

There’s still 95 days of the year to go, and yet 2021 has already gone down in the record books with more secondhand ships changing hands than ever before. Latest data from Clarkson Research Services shows that the record S&P activity has seen 114m dwt bought and sold in the first 38 weeks of the year, an annual record. The record prior to this year was 2020 with 101.5m dwt, and before that, 2017 with 92m dwt. Containership and bulker S&P prices are up by around 120% and 70% respectively since the start of the year.

Based on the latest figures, Clarksons suggests the industry is on track for 7.3% of the start year fleet to change hands this year, the highest percentage proportion since 2007. It is important to bear in mind that today’s merchant fleet is over 60% bigger than at the start of the financial crisis 13 years ago.

Data from Allied Shipbroking shows that year to date owners from Greece and China are by some distance the biggest buyers of secondhand tonnage. Selling-wise by nation, Japan tops the charts followed by Greece. As of September 19, this year, a total of 1,450 ships worth $22.08bn had changed hands while for the whole of 2020 1,180 secondhand vessels worth $16.41bn were bought and sold, Allied data shows.

On the outlook for ship sale volumes and prices into Q4, Rebecca Galanopoulos Jones, head of research at brokers Alibra Shipping, told Splash today that the dry cargo S&P market has been firm over the usually quiet summer months and with positive sentiment for dry bulk commodity demand going forward, strong freight and FFA markets, Alibra is expecting this market to remain firm both in terms of sales and prices. On tanker prospects, the Alibra researcher said: “Tankers are not really moving at all and until there is some evidence of a return in oil demand, it’s unlikely that this market will make much progress in the remainder off 2021.”

Long-term demand for dry bulk commodities could be hit by the impact of the Evergrande situation, even though analysts largely agree that the short-term impact of the debt woes of China’s largest property developer has been muted for spot rates. At the beginning of the week, when the debt default crisis became apparent, with downgrades by leading credit ratings agencies that had a knock-on effect on equity markets on concerns of contagion, there was a sell-off in the dry bulk forward freight agreement markets, according to Braemar ACM. The October capesize contract shed some $3,000 in value, hitting an intra-week low of $43,000, while the Calendar 2022 contract dropped by about 5% to under $25,000. But in recent days the near-dated contracts quickly recovered, reaching fresh highs, as an ever-tightening Pacific market continued to propel capesize spot rates skyward, the brokerage said. Despite a rebound in the first-quarter contract, Cal ’22 remained 3% below the highs reached this month, indicating “some concerns remain for demand later in the year”.

“At a time when China is trying to reconcile its geopolitical ambitions with slowing growth rates, we believe that it is firmly in the government’s interests to act quickly to prevent the situation from deteriorating,” Braemar said in a research note. It said more serious risks lie in the longer-term prospect for China’s economic growth if the property sector sees a lengthy slowdown. It is widely reported that the company agreed to settle repayments on a domestic bond, allaying fears.

Braemar added that even if struggling firms are bailed out, tougher conditions for developers “will likely translate to less aggressive expansion, fewer speculative housing projects and a shift in the Chinese economic growth model”. The “multiplier effect” on infrastructure was another key area where the slowdown could impact shipping, it said. “If growth expectations are downgraded, there will of course be a knock-on effect on demand for dry bulk commodities, particularly those relating to construction and heavy industry, such as iron ore,” it concluded.

According to Arrow Shipbroking, the property sector accounts for 30%-35% of steel demand in China, which means if there is a sharp downturn, China’s dry bulk imports will take a hit, particularly those related to steel. However, it is also a significant contributor to the Chinese economy, accounting for about a quarter of the domestic output. It is a sector in which most of the population’s wealth is tied up. “A disorderly collapse of Evergrande and a potential wave of developer failures would have significant economic and social consequences that the policymakers would undoubtedly want to avoid,” it said in a research note. “We believe a more realistic and likely scenario is a managed restructuring in which other developers take over Evergrande’s ongoing projects in exchange for a share of its land portfolio”, meaning construction would continue, with a minimal impact on dry bulk demand, it said.

On the other hand, the property market in China has been slowing for some time now, with a drop in sales leading to lower construction probably felt in the coming quarters. That means China’s demand for construction-related commodities will undoubtedly cool, but not collapse, according to Arrow. BIMCO’s chief shipping analyst Peter Sand echoed similar views, saying that the Evergrande issue is one of concern for longer-term dry bulk demand, given China’s dominance. It signals the peak in housing and infrastructure may be behind us, given that the lion’s share of migration from countryside to the urban mega cities happened in the 2010s, and although more is to come, it will be at a slower pace, Mr Sand said. However, the news does add to changes underfoot in China’s economy and policies over the coming decade, such as easing carbon emissions by 2030 which will likely lead to lower coal imports, combined with weakness in steel production and consumption, he said. “The easing of China’s growth rates won’t put a dramatic end to the current strong freight levels, but a gradual slide can be expected” going forward, he added. Part of the strength in the dry bulk market at present can be attributed to pandemic-related inefficiencies causing capacity to be snarled up in congestion outside ports in China, at a time when global economies recover from the pandemic.