Spot rates for capesize bulkers should stay high despite China’s lower steel production as the nation’s struggle with Covid-19 keeps the ships anchored off its shores, market experts said. China has steadily slowed output of the commodity over the past four months as part of an ongoing strategy to lower carbon emissions. The country’s monthly crude steel production has fallen 16.3% since May to 83.2m tonnes for August, according to the National Bureau of Statistics of China. Manufacturing of steel products has, meanwhile, dropped 10.3% to 109m tonnes.

“As long as the current status of tight supply is maintained, capesize rates can maintain their strength, even move higher,” said John Kartonas, founder of asset-management advisory firm Breakwave Advisors. “I think this has to do more with the ongoing congestion issues rather than strong demand. In fact, demand for iron ore transportation has not increased significantly from last year according to our numbers.” The capesize 5TC, a spot-rate average weighted across five routes, has jumped by 33% since 8 September to $53,795 per day on Monday, according to Baltic Exchange data. The average spot rate for capesizes on the Brazil-China round voyage — a heavily used route for shipping Brazilian iron ore to China — improved 28.3% to $44,376 per day.

China’s lower steel output still “does not bode well” for capesize rates because it may lower vessel demand, but port congestion certainly makes for tight supply, he said. But congestion levels can be unpredictable, he added. “This is something to closely watch and see how it develops over the next several months as it would determine the near-term direction of spot capesize rates,” he said.

The decline in Chinese steel production may already be baked into the capesize market, given the buoyancy of the paper market, Noble Capital Markets analyst Poe Fratt said. “I think that the cape rate volatility in August probably was a function of the decline in Chinese steel production,” he told TradeWinds. “While additional cuts in steel production could impact cape rates, I am seeing that FFAs [forward freight agreements] for capes have rebounded and are holding up.” Future rates were up on Monday through full-year 2023, particularly for this month.

The FFA rate for September picked up $675 per day to come in at $48,996 per day. The October rate improved $629 per day to $45,593 per day.

The shipping and commodities markets have gone from doom and gloom to a huge upswing in just 18 months leaving the question as to what lies ahead. Leading executives taking part in the Sea Asia Global Forum grappled with these changes in a wide-ranging discussion, which can be viewed in full here. Speaking at the forum Vandita Pant, Chief Commercial Officer of BHP, commented: “It’s very interesting that in an age of disruption in the last 12 – 18 months, the kind of ‘v-curved’ of shapes we have seen on flows is quite incredible, once in a lifetime kind of depth, followed by once in a lifetime kind of rebound.” These very strong growth rates have combined with disruption to the supply chain caused by the Covid-19 pandemic and as a result BHP reckons that congestion is eating up 15% of dry bulk capacity, compared to 7 – 8% pre-Covid.

A similar, if not even more extreme situation, has been seen in the container trades and PSA International CEO Tan Chong Meng agreed that there had been a once in a lifetime dip followed by a once in a lifetime recovery. A huge surge in demand in container shipping has been driven by consumer demand which has switched from services to “white goods” propelling manufacturers to quickly restock causing serious bottlenecks in the supply chain. These bottlenecks have had a serious impact on available capacity. Tan explained that a typical container would do six turns a year, however, congestion has reduced this to 4.5 turns a year. “So that’s about 20% capacity forgone. We can’t make containers fast enough, this year, the number of containers ordered, manufactured and to be introduced, will be about the same number as the last two years put together. So, people are trying very hard. And people are ordering ships is 20% of additional fleet that will come up if all the orderbook will be fulfilled by 2023- 24. But it’s not happening at the time when it’s badly need,” Tan explained.

Toll Group Managing Director Thomas Knudsen highlighted that the capacity crunch in both ocean shipping and air freight had spurred the take up of rail cargo services between Asia – Europe. “And now suddenly, we’re seeing real opening up between Vietnam and China as an example. And several other areas,” he said. When will things start to normalize is a big question. Tan said PSA believes it will be in the first half of next year. Meanwhile Knudsen explained that while they are hoping ports and other infrastructure will open up, “the impacts will continue for a while”. Longer terms there are questions as to how future sourcing strategies and supply chain diversification, combined with decarbonization will play out and impact shipping.

Tan said: “I think you’ll have episodes of China plus one, because of the trade regionalization because of resilience, shortening of supply chain, because of looking at different ways to reduce your overall footprint, where previously was driven by cost and labour arbitrage.” Knudsen said he thought there were some lessons that needed to be learned about diversified supply chains. “That’s geographically, via sourcing and so on, but a T shirt is still going to be cheapest to make in Asia, that’s not going to fundamentally change. But if you’re making a $500, expensive men’s shirt, you might do it in Italy. But that doesn’t fill containerships. So, I think some of the fundamentals will remain and Asia will do well, China will do well, Southeast Asia will grow. And yes, there are some new sourcing taking place. But a lot of things are the same as they were two years ago,” Knudsen said.

Looking to commodities BHP’s Pant highlighted the impact of decarbonization going forward and how infrastructure required for this will create commodities demand. “You cannot do renewables, without copper. You cannot do electric vehicles without nickel. You cannot do huge pipelines of hydrogen….without steel, and hence, the shift of angle will be that commodities are going to be essential for decarbonization,” she stated.

Patrick Lee, Chief Executive Officer of Standard Chartered in Singapore, also sees decarbonization as having a major impact on supply chains. “We recently did a survey of some of our multinational clients, and about 90% of them said that they are setting emissions targets for their suppliers. So that has a huge bearing on supply chains, and what how they’re going to be configured and how they’re going to be financed and how they’re going to be set up,” he said.

Vandita Pant, chief commercial officer of mining giant BHP, is confident that strong growth in commodities demand will keep bulk carriers busy for a good while longer. However, she cautioned that it is unlikely there will another commodities super cycle.

Pant, whose remit includes freight and shipping, said at the Sea Asia conference on Tuesday that vessel congestion resulting in supply chain disruptions caused by the coronavirus has effectively taken 15% of vessel capacity out of the bulker market. The double-digit percentage is double the 7% to 8% experienced in pre-Covid-19 times. “This is very much reflected in the price of freight,” she said.

Pant described the drop in commodities demand after the outbreak of the pandemic as being a sharp ‘V’ shape. “The return of flows is quite remarkable. Last year, China rebounded very quickly, and this year the rest of the world has come back like a tailwind.”

This rebound has not come without its problems. Congestion at ports that continue to be plagued by Covid-19 disruption has led to exporters and shippers looking to source bulkers to carry their cargo, frequently finding that none are available. Pant expressed a bullish view on the commodities markets. She expects demand for iron-ore, copper, nickel, and other ferrous metals to grow significantly over the next few years.

“Trade demand for commodities will not go away. Industrial growth and consumer demand will continue,” she said, adding that building the infrastructure for decarbonization will create further demand commodities. Asked whether this would lead to another super cycle, Pant described it as “too grand a word. The market looks very positive going forward. There is a good trajectory of demand.”

This bodes well for a solid performance for dry bulk, where some major players have predicted that strong rates will continue for at least the next two years on the back of rising commodity shipments.

Berge Bulk chief executive James Marshall said at a recent Marine Money conference in Singapore that pandemic-related constraints such as strains on logistics and the efficiency of the fleet added short-term “spiciness” to an already strong market.

Yesterday, the dry bulk FFAs for Capesizes closed -6% for Q4. However, Capesize spot rates rose 4.6% today while the Q4 FFA recovered 7% to above Friday’s level again. Hence, there seems to be a widening disconnect between the dry bulk shipping market and the broader market sentiment. Uncertainty surrounding steel, and ultimately iron ore demand, remains high due to Evergrande as roughly 1/3 of Chinese steel demand relates to the property sector. Still, steel prices have remained firm so far, although iron ore has tumbled dramatically over the past weeks.

If we’re looking for positives, any heightened uncertainty should keep further orders at bay and prolong the situation of limited fleet growth. We continue to be optimistic on the longer-term story and see several factors contributing to tight markets for still some time, including excess coal demand, higher congestion, and tight markets for vessel segments least affected by iron ore and China risk (e.g. the still-soaring Supramax segment).

Fears of a debt default by Chinese property developer Evergrande are prompting a major sell-off of New York-listed shipping equities, hours after hurting those trading in Europe and Asia. A dozen New York-listed dry bulk shipping stocks fell more than 10% by early afternoon Monday on Wall Street. Shares of Golden Ocean Group, which trade on the Nasdaq stock exchange under the ticker symbol GOGL, plummeted 14.7% to $9.56 per share. The company owns 56 capesizes, 38 panamaxes and three ultramaxes. Those for Diana Shipping, which trade on the New York Stock Exchange under the ticker symbol DSX, slid 13.6% to $5.06 per share. It has four newcastlemaxes and 12 capesizes among its 36 ships.

The larger-asset owners’ stocks fell hardest because their ships carry the iron ore that China turns into construction steel, but even those traded by the owners of smaller ships took a big hit. Eagle Bulk Shipping’s shares, which trade on the Nasdaq stock exchange under the ticker symbol EGLE, slid 13.4% to $43.80. This New York-listed owner owns 27 supramaxes and 26 ultramaxes. Jefferies analyst Randy Giveans said the “rough morning” was almost entirely due to Evergrande’s financial troubles that include $89bn in debt. “These headlines often cause panic, especially in a market that is so tight like dry bulk,” he told TradeWinds. “As for the future, it really depends on the length and degree of the Evergrande fall-out. It could be a short-term event if the group gets financial assistance.” The Evergrande situation has caused tremors throughout dry bulk shipping because “China is the focus of all of shipping“, he said.

Noble Capital Markets analyst Poe Fratt said Evergrande’s debt scenario has certainly pulled down dry bulk shipping equities, but China’s lower steel output is also causing them to fall. The country’s monthly crude steel production has fallen 16.3% since May to 83.2m tonnes for August, according to the National Bureau of Statistics of China. Manufacturing of steel products has, meanwhile, dropped 10.3% to 109m tonnes. “It seems like the market has been looking for a reason to sell off and it is difficult to predict how much more profit-taking it will trigger, especially since quarter-end is approaching,” he told TradeWinds. “Overall, I believe that the dry bulk market is close to balanced and will recover when some of the uncertainty dissipates since the order book remains very supportive of a balanced market.”

The tanker and containership equities markets are also having an off day, with most of those stocks falling but not as severe as those in dry bulk shipping have. Stock held by Navios Maritime Acquisition, which trade on the New York Stock Exchange under the ticker symbol NNA, declined 8.7% to $3.34. The company owns 44 tankers.

Share of boxship owner Danaos Corp, which trade on the New York Stock Exchange under the ticker symbol DAC, slipped 6.6% to $75.91.

As the price for iron ore drops, the relative cost of freight increases. Previously, we saw potential support in looking at this historical correlation when freight cost for iron ore out of Australia and Brazil amounted to c5% and c10% of the commodity price. As prices tumble the implications have flipped, with the freight element now at 14% and 30% of the commodity compared to the historical average of 8% and 19%.

Reportedly, China aims to limit crude steel production close to 2020 levels in a stated effort to reduce pollution. If pig iron production (+80% of steel production) is capped at last year’s 887.5 MMT, we estimate that the last four months of 2021 would see an average production of roughly 71 MMT, which is down 5.7% YOY and would negatively impact China’s near-term iron ore demand. In our view, China’s recent curb of steel production could be linked to high energy prices and power rationing ahead of rising demand in the winter months. This view is supported by reports citing a state-run Chinese newspaper claiming that coal-fired power plants could struggle to keep the lights on this winter. YTD, China’s thermal electricity production (+70% of total production) is up 13.7% while coal production is up 6.0%. In turn, this has led to rising coal prices as imports only account for a fraction of China’s consumption. Limiting steel production would therefore alleviate some pressure on domestic electricity production given the segment’s relatively high energy intensity.

Consequently, should China limit steel production for the remainder of 2021, iron ore would be negatively impacted but could be partially offset by rising coal imports ahead of peak demand. We remain optimistic on the long-term prospects in the sector, and we view short term headwinds providing a more attractive entry point for investors who missed on the bull run year-to-date.

Amid the bullish pronouncements for the cape sector, one alarming statistic has given owners pause for thought. Beijing revealed this week that Chinese steel output dropped by more than 12% in August to 83.2m tonnes, the greatest year-on-year slump since the global financial crisis, according to data from brokers Braemar ACM. In absolute terms, August’s year-on-year steel output drop of 11.6m tonnes marked the greatest ever.

“Over the first half of the year, authorities failed to meet targets of flat output levels relative to 2020, but over the last couple of months capacity cuts have been far more aggressive than we expected,” Braemar ACM stated in an update to clients yesterday, noting too how iron ore prices have slumped recently to lows not seen since last October.

China’s restrictive policy on commodities and especially on the steel market was discussed in a recent dry bulk update from BIMCO. “After strong growth in the first half of the year, the Chinese government seems keen to clamp down on the steel and other heavy industries to limit emissions. One big question is how strictly these measures will be enforced and whether they will start to constrain economic growth,” the BIMCO report noted. The two largest dry bulk goods imported by China in terms of volume, iron ore and coal, have both fallen year-on-year during the first seven months of the year.

Other August pointers that ought to raise concern for cape owners were highlighted by Braemar ACM yesterday. “Economic markers such as industrial output, infrastructure investment, retail sales and floor space under construction also registered the slowest levels of growth since the pandemic hit China in early 2020. All of these have also raised question marks over China’s long-term dry bulk demand prospects,” Braemar ACM analysts pointed out.

Arguably the biggest concern is the enormous debts being uncovered among China’s leading property developers. Alarm bells rang this week, with the news that the world’s most indebted real estate developer, Shenzhen-headquartered Evergrande, is struggling to make loan payments on its more than $300bn in liabilities—a sum roughly equivalent to the public debt of Portugal.

While Evergrande has been making the most headlines, there are a host of other big Chinese property developers who have revealed massive debts this year. Combined, these companies – each in default or significant stress – represent over half a trillion dollars of total liabilities, leading some economists to warn that contagion in the property sector could cause a Chinese banking crisis.

“Instability in the property markets presents a significant risk for the longer term,” Braemar ACM warned yesterday.

The laws of supply and demand work on the axiom that if there is a shortage of goods or services the price of those goods or services goes up. In a free market, sellers have the freedom to charge what they want, and buyers have the freedom to choose to pay or not. If enough choose not to, the seller either adapts his prices, or loses business to a cheaper rival. In container shipping, where congestion at ports and inland distribution has reduced the available capacity of ships and equipment in a period of strong demand, those laws have held. Prices have risen as desperate shippers seek to find slots for their cargo.

But recent moves, kicked off by CMA CGM and followed by Hapag-Lloyd, appear to be defying economic reality. Prices, the two lines said, were high enough and they would not impose any further general rate increases on spot cargo for five months. That is the maritime equivalent to leaving money on the table and raises questions about why they may be doing it. The explanations given by the two lines leave many of those questions unanswered. CMA CGM said it wanted to prioritize its long-term relationship with its customers. Hapag-Lloyd said it thought the market had peaked and hoped that rates would calm down. On the face of it, both responses show a remarkable level of altruism not usually seen in any business, far less container shipping, but both are also quite facile. No company would want to not prioritize its long-term relationship with customers, and if the market has peaked, prices will stabilize or retrench without the need to do anything.

Hapag-Lloyd chief executive Rolf Habben Jansen had previously warned that if the carrier did not price at the market rate, its booking system would be overwhelmed in a day. If rivals continue to apply market rates while CMA CGM and Hapag-Lloyd do not, they face being swamped with orders. If they chose to take cargo on a first-come, first-served basis, rather than let pricing settle what volumes are taken, shippers able and willing to buy freight at any price — those with $1m of cargo in a single box care little about a $25,000 freight rate — will be in competition with those that got there first.

There may be a certain logic to this. Both carriers have put a focus on their long-term contracts. And with a lack of capacity driving up rates, what better way to encourage shippers towards long-term contracts than the promises of carriage. Now, those who are prepared to commit to volumes for the long run will be prioritized over those that can pay the most. And what better time to be converting spot market players to long-term contract customers than when the market is at its peak. If spot rates do eventually come down, those customers have volumes locked in at strong contract rates.

Freight rates are expected to turn. Figures from the Shanghai Containerized Freight Index showed rates for Asia-Europe rose just 0.4% while the transpacific was flat. We may already be at, or near, the peak. Volumes for the holiday season will have been booked and paid for already, and October’s Golden Week may see a chance for some easing of congestion. It could well be that having called the peak, these carriers have cleverly worked some marketing magic to appear as sympathetic to the pain felt by their customers while driving them to keep paying elevated prices for longer.

If that is the case, the laws of supply and demand remain unbroken.

AP Moller-Maersk has added $4bn to its profit guidance for 2021 on the back of logistical bottlenecks and surging container rates. The Danish giant said it expects to record underlying Ebitda of $22bn to $23bn during 2021, up from its previous expectations of $18bn to $19.5bn. Its underlying Ebit — operating profit — is expected to reach $18bn to $19bn, which is up from the previous range of $14bn to $15.5bn.

“The strong result is driven by the continuation of the exceptional market situation within Ocean, which has led to further increases in both long and short-term container freight rates,” the Copenhagen-listed group said in a statement on Thursday. Maersk said it made the revision because its financial performance in the first two months of the third quarter was “significantly ahead” of its previous expectations.

Its results for the second half of 2021 will be much stronger than those for the first half due “given the persistent congestion and bottlenecks in the supply chains“, it added. For the third quarter, Maersk expects to log underlying Ebitda of close to $7bn and an underlying Ebit of almost $6bn.

Maersk noted that the new guidance is still subject to uncertainty because volatility is higher than normal due to “the temporary nature of both the demand patterns and disruptions in the supply chains”.

Free cash flow for the full-year 2021 is now expected to total at least $14.5bn, up from Maersk’s previous estimate of an $11.5bn minimum.

The group’s cumulative capital expenditure guidance for 2021-22 remains unchanged at about $7bn.

AP Moller-Maersk is scheduled to publish its third-quarter result on 2 November.