A raft of veteran capesize bulkers have gone for scrap in the last year, but we are unlikely to see many more in the foreseeable future, a top broker says. Some 34 capesizes of over 20 years of age have been scrapped over the past 12 months, according to Simpson Spence Young (SSY). At the end of July there were just 39 capesizes, of 6.6m dwt, built in 2001 or earlier still trading. For comparison, 12 months ago there were as many as 73 capesizes of 15.1m dwt built in 2001 or earlier on the water and at end-July 2019 the figure was 108 such vessels of 23m dwt. These were equivalent to a respective 4.2% and 6.8% of the trading fleet in dwt, the shipbroker says in its latest monthly report.

SSY said the impact is even more pronounced for capesize tonnage delivered in 1996 or earlier, which numbers just four vessels at present, compared to 25 a year ago. Equally dramatic is the number of converted ships in operation which has shrunk from 46 vessels of a combined 12.6m dwt at the start of 2019 to just two ships, both of which now operate on the Guinea-China bauxite trade. “This is largely the result of the removal of the elderly VLOC fleet converted from single-hull VLCC oil tankers,” said SSY. “The phaseout of conversions on Vale’s iron ore trades was completed with the last cargo discharge in December 2020 following amendment or early terminations of contracts with Vale.” SSY said the average age of scrapped capesizes since the start of 2019 was 24 years of age.

However, for further demolition to take place, SSY said the average age of scrapped vessels would have to reduce, bringing it into line with previous trends. “During the previous demolition upturn of 2016, for example, the average age of a scrapped capesize vessel was 20 years of age,” the shipbroker said. Strikingly, SSY says the capesize fleet has the smallest proportion of older tonnage in service of the four main bulker sizes.

“After several years of minimal demolition activity involving vessels from the panamax fleet, there are still some 364 panamaxes of 27.1m dwt built in 2001 or earlier in service, which represents some 11.5% of the trading panamax fleet in deadweight terms,” it said. “Furthermore, the equivalent percentages for the Supras and handysize fleets are 9% and 14% and numbering 409 and 562 vessels, respectively.”

Even with demolition prices on the Indian subcontinent at their highest level since 2008, SSY said there are few incentives at present for bulker owners to scrap given such strong trading conditions and secondhand sale and purchase market. Indeed, SSY said May to July 2021 inclusive marked the lowest three-month sequence for dry bulk carrier deletions since 2018. In addition, there are just 10 bulkers recorded as sold for scrap, although, crucially, these are still to arrive at the breakers’ yards, the shipbroker added. “Confirmed year-to-date deletions from the bulker fleet are running at 6.4mdwt, behind last year’s corresponding pace of 7.6m dwt,” it said.

A surge in the number of ships waiting outside ports in China is tightening effective fleet supply and helping to push rates to record levels. We look at the drivers behind this and how freight is being affected.

Another China story

At the global level, queues of bulk carriers at ports and anchorages hit a peak of almost 142 MDWT over the weekend, the highest level we have on record and about 15% higher YoY. However, drilling into this data by region, elevated congestion in China appears to be the driving force behind this trend. Accounting for more than a third of total congestion, bulker capacity queuing in China hit an all-time high of 52.7 MDWT on the weekend, representing 6% of the global trading fleet. This figure also represents a spike of 28% MoM and 23% versus this time last year, which was itself a busy period for ports in China. Outside of China, congestion remains relatively high, but is behaving in line with its usual seasonal pattern, which is dictated by the various crop harvesting periods and weather-related factors.

A major driver of the uptick in China has been a tightening in Covid-19 restrictions, put in place to stem a spate of outbreaks of the delta variant in the country. It’s tough to nail down exactly which rules are in place at each port, but the individual restrictions and bottlenecks are compounding to slow the turnaround of ships in Chinese ports. Based on the latest information from port agents, the only blanket quarantine measures at most Chinese ports are for ships which have called to Indian ports or have taken on Indian crew members in the previous 30 days.

Some of the most significant disruption appears to be in the Yangtze River region, where ships face strict pilotage rules. The region’s anchorages account for about 18% of total bulker congestion in China, but it has become a particularly bad bottleneck for geared vessels. Last week as much as 30% of Supra and Handy congestion in China was in the Yangtze region, where power plants have recently upped their purchases of Indonesian coal. Compared to the bigger ships, the geared fleet has seen the greatest YoY increases in Chinese congestion as a share of the trading fleet, reaching a record 5.2%, up by 2.1 points YoY.

Regardless of how long vessels have been at sea since their last port call, their risk level is reportedly being assessed by authorities based on factors such as crew nationality and boarding time, navigation route and cargo on board. On top of this, quarantine measures have greatly reduced the number of pilots operating on the river, which has been slashed by up to 50% versus normal levels. At other ports, we are hearing reports of mandatory quarantine periods, cargo operations not being allowed to proceed until negative PCR test results are obtained and other protocols contributing to build-ups of tonnage.

Grain storage still an issue

For the Panamaxes specifically, another key driver of congestion has been a lack of grain storage capacity in China. The country’s binge on foreign grain supplies over the last few months has translated to a spike in the number of laden vessels arriving, but terminals’ infrastructure has not been able to keep up, and ships are facing lengthy stays outside ports before being able to discharge. China’s total grain imports over the first seven months of the year totaled almost 100 MMT, up by around 32% YoY, with monthly receipts hitting an all-time high of over 17 MMT in June. Most of the increase came from imports of corn up by 290% YoY so far in 2021 to 18.7 MMT after China increased its purchases to feed a recovering pig herd and rebuild stockpiles. Congestion resulting from grain imports is likely to remain high over the coming weeks, with laden vessels continuing to arrive.

Meanwhile, effective fleet capacity is being squeezed further by a recent uptick in yard activitydue to a spike in ships requiring special survey work. Based on the age profile of the fleet, 2,259 bulkers hit the 5-, 10-, 15- or 20-year-old mark this year, up by about 12% YoY. Across all vessel types, we count about 8.5 MDWT in shipyards across the Far East. About half of these are Capes, though with about 80% of these ships hitting special survey age, the remainder may be retrofitting scrubber units now that the spread between VSLFO and HSFO prices have widened again. Current Cape yard activity is still about 10 MDWT lower than what it was in late-2019, which represented the peak of scrubber-related yard activity.

The market

With the carrying capacity of the fleet being trimmed, the market is clearly receiving support. After underperforming relative to the smaller ships, average Capesize rates are now approaching the $50,000 per day mark (not seen since June 2010), while near-term freight futures have rocketed by about 47% in the space of a month, implying further rises in freight. Meanwhile, strength is continuing to build on the smaller ships too, with Handies seeing 2008-level rates, and the Baltic’s 58k Supramax index surpassing $35,000 per day for the first time since it began printing in 2015. It seems unlikely that the Covid-related stresses on China’s port activity will ease overnight, and with little room for grain capacity expansion, the pile-up of agricultural cargoes is also unlikely to quickly diminish. On the bigger ships, the recent uptick in iron ore shipments in both basins could also trigger an increase in the volume of Cape arrivals in China over the next few weeks, sustaining queues further. With these factors in mind, we believe there is still further upside to today’s incredibly strong market, despite this week’s turmoil in commodity prices.

The Meishan terminal at Ningbo-Zhoushan port remained closed for a sixth straight day on Monday, with ship queues outside the port at record levels.

A 34-year-old port worker was found to have caught Covid-19 sparking the terminal’s swift closure early on Wednesday morning last week. In the intervening days, several liners have rerouted ships to avoid Ningbo-Zhoushan. The terminal accounts for around one fifth of the approximate 30m teu throughput of the port.

When a Covid-19 outbreak hit Yantian Port in eastern Shenzhen in late May, the port was partially closed for around four weeks creating massive liner disruption.

While the port authority remains tight lipped in Zhejiang Province, sources in Ningbo told Splash today that the port has earmarked a tentative reopening date for Meishan of September 6.

The sheer enormity of Ningbo-Zhoushan port, the world’s largest port in tonnage terms, appears to have helped prevent a wider total port lockdown.

Meishan Island is approximately 30 km away from Ningbo’s major container terminal at Beilun, and 60 km away from Ningbo downtown.

Container lines are benefiting from the investments and cost reductions made during the past 10 years but 2022 will be the real test for profitability, particularly if rates ease back from their current highs. “Liner profitability in the past 10 years had been driven by a stringent cost control,” said BIMCO chief shipping analyst Peter Sand. “We have really seen carriers drive down costs through every bit of their business. All the upscaling to ultra-large containerships offer the opportunity to reap economies of scale if it is possible to fill the ships.” That was driving the sharp increases in profitability seen in results from the first half of the year, at a time of high demand for goods and record rates.

“What you see in the current market is really all that effort coming into effect with a record low-cost level for container transport heading into a market that has risen this sharply,” he said. “It made the carriers capable of benefitting fast from that uptick, not only in the spot market.” But the spot market had driven a spill-over into the long-term contract market too. “There is a relevant correlation between spot rates now and contract rates coming up,” Mr Sand said. “If we look to 2022, that is the key to profitability for carriers. The lion’s share of every carrier’s business is long-term contracts.”

Xeneta director Thorsten Diephaus said that while $20,000 per teu rates made the headlines, they were not the norm. “Revenue per teu as reported for the first half of the year was $1,500-$1,700 per teu,” he said. While that was up from $900-$1,100 per teu, most rates were lower long-term contract rates. “The majority of the contracts on the long-term market were agreed in the first half of the year,” Mr Diephaus said. “While the spot market has shot up over the summer, there are not that many new long-term contracts signed.”

But the upcoming contract season for 2022 would be a time of critical decisions for shippers faced with locking in high rates or trying to play the spot market. Mr Sand said the likelihood would be for longer contracts being signed. “The key customers are looking for better control of their future logistics costs,” he said. “If they want to pay less than what is being offered by carriers now, they need to sign up for longer periods of time.”

There was anecdotal evidence of indefinite contracts, with an element of adjustment built in, he added, and multi-year contracts were becoming more common. One advantage for shippers in securing contracted volumes was the security it offered, he said. “Surcharges are infecting the market to an uncontrollable extent and that is surely a worry for any shipper,” Mr Sand said. “If they can lock in for the next two years at what would otherwise be a very high level, they can avoid the hassle of being faced with surcharges that can add to costs.”

In the short term, however, there was unlikely to be any relief from high spot rates. “Many shippers are doing what they can to frontload cargoes to ensure inventories do not run short and that they have goods in store,” he said. “But when the market is already red hot and carriers are doing whatever they can to fill ships, any frontloading is mainly pushing up rates, not volumes. This leads to more rollover and extends the high volumes and rates.”

Norden’s money-spinning dry cargo business has helped the Danish owner-operator book its best quarterly result since 2015, following a loss-making start to the year. The Copenhagen-listed company also thinks it is on track to deliver its best annual figures in 11 years, which it said could fall between $140m and $220m.

The firm recorded net profit of $31.8m for the second quarter, up from $29m in the same period a year ago. The result marks a turnaround from the loss of $14.9m during the first three months of 2021, due to slumping product tanker markets. Earnings for Norden’s product tankers remained at negative levels during the second quarter, but this was more than offset by revenue from the company’s dry cargo activities.

Chief executive Jan Rindbo said things are going so well that Norden is upsizing its projections for its annual result by an extra $20m. “We have built a very strong dry cargo position during the first half year, which we will benefit from during the rest of the year, where we expect significantly stronger results,” he said.

“With recent increases in forward freight rates, this further adds to our strong outlook for dry cargo, and we therefore increase our guidance for the full-year adjusted result to between $140m [and] $220m.” Its previous estimate, made at the end of June, was between $140m and $200m.

Norden has also seen the market value of its owned and leased ships rise by $258m during the second quarter, thanks to the strength of dry markets.

Spot rates for capesize bulkers took their biggest leap in weeks on Wednesday as commodity demand remains high against tight supply. The capesize 5TC, a spot-rate average weighted across five key routes, jumped 8.3% to $44,495 per day, according to the Baltic Exchange. The average rate for the Europe-China route spiked 9.5% to $67,300 per day, while that for the China-Japan transpacific round voyage leapt 7.4% to $49,107 per day.

“I think now we reached new highs, it becomes a gamble on how high the spot index will go,” John Kartsonas, founder of asset-management advisory firm Breakwave Advisors, told TradeWinds. “If you get any positional tightness and you have an aggressive owner positioned accordingly, the sky is the limit.” But he warned against trying to predict how high rates will go in such a volatile market. “Although we all try to do it, I think it is a fool’s game,” he said.

“Averages are what matters, and I think the rest of the year is priced at around $40,000 per day, which, in my view, is where we will end up averaging.” He said capesize rates may slip amid any softening of the sub-capesize market as the weaker winter period approaches. “Any pullback there and capes will also feel the impact,” he added. “That is well priced in for now in the futures market.” But at the end of the day, it’s anyone’s guess, according to Kartsonas.

“Those who can accurately predict those factors can also pinpoint any potential correction down the road,” he said. “However, one should always keep in mind that supply in shipping is inelastic, and rates can exceed even the wildest forecasts.”

Average capesize rates may go as high as $55,000 per day if iron-ore shipments reach second-half predictions and global steel output stays high, Noble Capital Market analyst Poe Fratt said. They may go even higher if coal keeps flowing to China and port congestion does not abate, he said.

“I would prefer to see rates stay here,” he said. “Companies are generating high cash flow and there would be less incentive to order and build new capacity.”

Owners still need to remain on the lookout for any developments that may reverse positive market momentum, he said. “Rates could crash hard on a change in the global economic outlook — China is the key — or even drop due to seasonality, but any drop should be tempered by the supply outlook,” Fratt said.

“Higher highs are possible but higher lows seem likely given the supply picture. It’s hard to predict but if the stimulus well runs dry, there could be a reckoning.”

The largest export out of America’s top container port is air, a stark reminder of the massively pressurized situation slamming US supply chains this peak season. Giving an update on operations yesterday, Gene Seroka, the executive director of the Port of Los Angeles told reporters: “Our largest export commodity continues to be air as we reposition empty containers back to Asia.”

The volume of containerships at anchor waiting for berth space to open at the twin ports of Los Angeles and Long Beach has been growing all month. As of this morning, latest data from MarineTraffic shows a total of 30 boxships waiting in San Pedro Bay, a queue stretching south for some 20 km. Indeed, such is the severe backlog that the Marine Exchange of Southern California has been forced to open drift areas as both the bay’s primary and overflow anchorages are full. The last time this occurred was in January, and the current situation suggests next month could set new historic records for ships at anchor off America’s two main gateways.

The number of container ships at anchor outside the Port of Los Angeles is expected to rise again, with an anticipated 90% of arriving vessels next month “heading straight to the parking lot,” Seroka said yesterday. Approximately 75% of ships arriving at the port were sent to anchor in July — a 50% increase compared with June. Early August data shows 90% of arriving vessels have no alternative but to park. The amount of time they spend once they get there held steady at about five days in July, but Seroka said that too is increasing.

Average container dwell time at terminals is about 5.3 days, warehouses is 8.3 days, and rail is running over 13 days, Seroka detailed. Seroka said the challenge facing the entire supply chain amounts to “squeezing 10 lanes of freeway traffic into five lanes.” The port boss advised consumers to get their Christmas shopping plans in place far earlier this year or risk having some very disappointed family members come December 25.

The extraordinary pressure felt at many of America’s ports on intermodal routes is making headlines daily in US mainstream media. Earlier in the summer the White House announced the creation of a Supply Chain Disruptions Task Force. Led by the secretaries of commerce, transportation and agriculture, the task force aims to bring together stakeholders “to diagnose problems and surface solutions – large and small, public or private – that could help alleviate bottlenecks and supply constraints”.

Shares in NYK Line have reached their highest level since the shipping boom of 2007 and 2008 as investors react to the strong containership and bulker markets. Its shares closed on Tuesday at ¥8,370 ($76.35) each, while Mitsui OSK Line’s at ¥7,450 and those of K Line at ¥5,160 are also at 13-year highs. NYK Line has the largest exposure the containership market via its 38% stake in Ocean Network Express (ONE), while MOL and K Line own shareholdings of 31% each.

Container lines will likely get a boost in the second half of the year as strong demand, infrastructure bottlenecks and capacity constraints support an unprecedented rate backdrop, according to Bloomberg Intelligence senior industry analyst Lee Klaskow. “While [current] spot rates aren’t sustainable at these levels, second quarter read-throughs from peers including Maersk and Hapag-Lloyd suggest to us that better than expected momentum could push earnings estimates higher,” he said.

Fellow Bloomberg Intelligence senior industry analyst James Teo said the closure of a container terminal at China’s Ningbo-Zhoushan after a worker contracted Covid-19 could also push record freight rates even higher. “The closure may echo the three-week shutdown of Yantian port in May, where full capacity took over a month to restore,” said Teo. “Peak shipping demand ahead of the year-end holiday-shopping season and more typhoons may exacerbate stretched supply chains.”

All three companies also have large exposures to the dry bulk market with MOL for example controlling close to 300 bulkers including over 80 capesizes. On Monday Clarkson Platou Securities said capesize rates have gained further ground recently, with the Baltic Cape Index (BCI) inching closer to the $40,000/day level. “Spot capesize rates peaked in early May at $45,000/day but drifted towards $20,000/day in June following Chinese steel curbs,” said the investment bank’s managing director of equity research Frode Morkedal. “However, activity levels have been much higher over the past several weeks and Capes have seen continued firm demand for the past six to seven weeks.” Clarkson Platou Securities said the coal trade remains a “positive surprise”, as both thermal and coking coal are seeing much higher volumes which has support all vessel segments.

Meanwhile, supramax and handysize rates are continuing to set new highs for the year and stand at roughly $34,000/day and $32,500/day, respectively. Increased dividend payouts to shareholders are also driving the share prices of MOL and NYK Line higher, say analysts in Tokyo. At its results in late July MOL raised its full-year dividend per share (DPS) forecast to ¥550 in line with its dividend payout of ratio of roughly 20%. Meanwhile, NYK Line raised its DPS from ¥200 to ¥700 which equates to a dividend payout ratio of 23.6% and a dividend yield of over 8%. K Line remains the one uncertainty among the big three shipowners with the company continuing to leave its dividend forecast undecided. At the start of the fiscal year, the company said it would set a dividend based on factors such as dividends from ONE and the status of structural reforms for unprofitable business and ships. “While it will depend on ONE’s earnings and the dividend payout ratio going forward, given K Line’s current financial position, in the near term we see little likelihood of its dividend exceeding that of its peers,” said Mizuho Securities analyst Katsuhiko Suzuki.

Ultramax bulker owner Belships has declared its first dividend in years after a profitable second quarter, powered by income from its commercial arm Lighthouse Navigation. The company has also inked deals to add two further Japanese ultramax newbuilding resales to its fleet and sell an older vessel. The Oslo-listed company will pay out NOK 0.40 ($0.045) per share, equal to half of its net result for the three-month period. The last time it paid a dividend to shareholders was in April 2018.

Belships recorded net profit of $22.5m for the second quarter, equivalent to earnings per share of $0.09, up a loss of $14.6m in the same period in 2020. Much of the net result was generated by Lighthouse Navigation, Belships’ in-house commercial platform that handles cargo trading. Lighthouse contributed $14.5m of Belships’ second quarter Ebitda of $36m. The platform generated net freight revenue of $31.3m between January and June this year, compared to $26.7m in net earnings from Belships’ owned fleet during the six months.

Equities analysts were excited by the results as Belships exceeded consensus estimates across the board. Norne Research said Belships is “taking it to the next level” and Fearnleys Securities described it as a “knock-out quarter”. The company smashed the analyst consensus estimate for Ebitda, which was $23m. “Clearly, this illustrates the underlying leverage in [Lighthouse] and outsized earnings potential in strengthening markets,” analysts from Fearnleys Securities said in a note on Wednesday. The team said they “expect continued strong results in the coming quarters, albeit likely at slightly lower levels“. Both Fearnleys and Norne said they would make upwards revisions to their estimates, considering the results and the contribution of Lighthouse.

Mindaugas Cekanavicius, analyst for Norne, said he expects the next two years at least to be “very strong” for Belships. “The demand growth has been strong across almost all commodities and regions through 2Q21 while we can already see the winter restocking season ahead,” he said in a note on Wednesday. “The vessel deliveries, on the other hand, are on track to be the lowest since 2007 in number of vessels and in relative terms it is approaching the lowest level in several decades.”

Belships has continued to be busy in the sale-and-purchase market, acquiring two new vessels and selling an elderly supramax. The firm said it has agreed to buy two more 64,000-dwt ultramax newbuilding resales, which are under construction at an unnamed Japanese shipyard. Beltokyo is expected to be delivered in the fourth quarter this year and Belyamato is expected to arrive at the end of 2022. Beltokyo will be leased on a 12-year bareboat charter, which comes with purchase options “significantly below current market values” that can be exercised after the fourth year until the end of the charter, Belships said. The company said it will pay $4m on signing the contract this quarter. Meanwhile, the shipowner has confirmed the sale of its geared 58,700-dwt supramax Belcargo (built 2008), which will be delivered to the unnamed buyer in November.

Bulker markets have been strong this year to date and the best could still be ahead, according to John Michael Radziwill, the chief executive of pooling giant C Transport Maritime (CTM) and shipowner GoodBulk. Average daily capesize spot rates swung back up above the $40,000 level on Monday and Radziwill believes they could reach $50,000 before the end of the year. The volatility being seen in dry cargo markets, particularly for capesizes, is down to “the crazy world we live in today”, Radziwill said. “You’ve had different big cargo supply depots — and also where a lot of cargoes are delivered to — go through new waves of the coronavirus, so that kind of brings activity down and then pushes it back up,” he explained. “And then you have had your usual seasonal complications, especially with Brazilian iron ore. Also, a little bit of weather-related disturbances in the soft-commodity trades, like in South America, and in China, there was a big flood.”

GoodBulk and CTM, however, are comfortable with a little chaos. “What we say is we’re conditioned to thrive in volatile environments, so when the volatility gets more and the market gets a little crazy, we like to think that we are kind of more comfortable and actually calmer and able to navigate around it,” he said. “We’re able to do that, frankly, because of the synergies we create among all of our participants and the platform we’ve been able to build.” Radziwill expects average capesize earnings to surpass $50,000 per day this quarter and said they should remain above $40,000 for the remainder of the year. “I think you have a lot of stars aligning in the iron ore output, especially from Brazil, that’s long-haul tonnes,” he said. “But we have the seaborne coal trade; that’s actually surprised us the most to the upside. We don’t see that stopping, certainly not this year. It’s very strong.” All this is being underpinned by consistently robust demand for soft commodities like grains, he said.

“We have a shift east from South American grain exports, and that will move more into Europe, the Black Sea and the US. You have a shift in grain seasons, but we think those volumes will stay up,” he said. Reading into this demand, Radziwill said it shows forward planning by major importers to prevent a replay of the recent past. “If we remember in 2010 and in 2008, there were global food shortages. And with everything that’s happened generally in the world with the pandemic, the social unrest, we find it very difficult to believe that governments wouldn’t continue to buy as many kinds of food-source commodities as they possibly could,” he explained. He expects that logistical bottlenecks and inefficiencies will continue to affect bulker trades for the time being. “I actually don’t think we’ll be able to have a more efficient market in the sense that we won’t have delays, or you won’t have ships having to be at sea longer — because of crew changes and precautionary measures related to the pandemic,” he explained. “I think as owners, we should really be prepared for 2022 because we would be very surprised if day rates are not much higher in 2022 than they have been in 2021 — and 2021 has been a very good year.” But if the market moves up as expected, then so too will GoodBulk’s opportunity costs, he said. “So, we have to be very careful and very diligent going into 2022. A good market is when we have to work the hardest and the smartest,” he said. “We have to be more concentrated because every decision is frankly worth more money for our shareholders.”

But against this backdrop of high vessel earnings and a positive outlook, there are still things that worry Radziwill. “What’s keeping me awake at night is the safety of our crews in this pandemic and how we can protect them as much as possible,” he said. “I want our crews to be safe and, of course, I want all of our staff and our stakeholders in the CTM family to be safe but starting with the crews.”