Data released today shows that China’s electricity production in October totaled 661 billion kilowatt hours.  This is down month-on-month by 22 billion kilowatt hours (-3%) but is up year-on-year by 21.6 billion kilowatt hours (3%).  The month-on-month decline is normal and occurs virtually every October.  Of more significance is the year-on-year growth.  Also of note is that industrial production grew year-on-year by 5%, and crude steel output grew year-on-year by 11%.

Hydropower output totaled 99.4 billion kilowatt hours.  This is up month-on-month by 400 million kilowatt hours but is down year-on-year by 20 billion kilowatt hours (-17%).  As we have been stressing in our research, hydropower output has been coming under considerable pressure due to low water inflow, and last month’s weakness has again come as no surprise.  The last three months have now seen China’s hydropower output contract on a year-on-year basis by 19%.

Coal-derived electricity generation totaled 445.3 billion kilowatt hours.  This is down month-on-month by 38.6 billion kilowatt hours (-8%) but is up year-on-year by 18.9 billion kilowatt hours (4%).  As with overall electricity production in China, coal-derived electricity generation normally declines on a month-on-month basis in October.  Year-on-year change is more noteworthy and the 4% growth is decent.

China’s coal production totaled 370.1 MMT.  This is down month-on-month by 16.6 MMT (-4%) but is up year-on-year by 13 MMT (4%).  As we have continued to stress, the government is no longer primarily focusing on improving safety and instead has shifted its focus to ensuring robust coal production. 

Chinese steel production for October came in broadly in line with the 5-year average of 80.0 MMT as the National Bureau of Statistic reported production of 79.8 MMT, down 8.3% MOM but up 11.4% YOY. This brings steel production in line YTD with last year.

The raw material intensive pig iron production was 70.8 MMT for October, down 4.2% MOM but up 12.4% YOY. Pig iron production came in 6.5% over the 5-year average for October, and now stands 2.6% above last year YTD. After strong steel production at the start of the year, we see volumes converging towards the historical averages into the seasonally weaker winter months.

Chinese coal production tallied 370.1 MMT in October, down 4.3% MOM but up 3.6% YOY, bringing the total YTD growth 13.3% higher than last year. Hence, coal production remains high as China continues to build strategic stockpiles as previously announced, while still keeping up imports. However, the elevated production numbers cast shadows on long term import demand from one of the major coal importers. Still, in the current markets, we believe coal exports should find an alternative importer.

The UN-led Joint Coordination Center overseeing the export of Ukrainian grain products has reported a backlog of 60 bulk carriers waiting to load cargo as Ukrainian authorities continue to blame Russia for holding up inspections. An additional eight bulkers loaded with wheat, barley, corn, and sunflower meal vessels are waiting for inspection in Turkish territorial waters. Another four were reported on Monday as being ready to depart Ukraine.

Istanbul is the hub for mandatory inspections under the UN safe passage scheme. Under the terms of the scheme, inbound and outbound ships must be vetted by UN, Turkish, Russian and Ukrainian officials, who check documentation and make sure there are no weapons or unauthorized cargo and personnel on board.

Delays have been commonplace since the Ukrainian grain corridor was first launched in July, with the Joint Coordination Centre attributing this in part to the success of the scheme. It stepped up the number of inspections in response. The amount of grain and other foodstuffs exported under the Black Sea Grain Initiative so far exceeds 10.7m metric tons, according to a CNBC report on Monday.

Ukrainian Foreign Minister Dmytro Kuleba, addressing the recent Association of Southeast Asian Nations (ASEAN) Summit in Cambodia, accused Russia of playing “hunger games” with the world over the Ukraine Black Sea grain deal. Kuleba said measures should be taken to ensure its inspectors were not intentionally delaying shipments and forcing global prices to rise. “It’s not enough just to keep Russia on board. It’s also important to make sure that Russian inspectors who participate in this initiative, that they act in good faith and that they inspect ships without any artificial delays,” he said at a press conference held in Phnom Penh.

Russia suspended its participation in the scheme on 29 October after alleged drone attacks on several Russian warships in the Crimean port of Sevastopol. It returned to the scheme four days later, claiming that it had obtained the guarantees it had been demanding from Ukraine that the corridor would not be used for military purposes. The four-month deal is subject to renewal on 22 November. Russia has warned that it might call it off if the West does not drop some of the sanctions that would facilitate the export of Russian fertilizer and agricultural commodities.

The majority of the bulk carriers engaged in the Ukraine trade under the safe passage scheme are older vessels.

China’s recent signals of loosening the collar of strict Covid-19 protections that have helped choke its economy are about to spell good news for the dry bulk sector, just not immediately. Analysts at Deutsche Bank see dry bulk names remaining under pressure through year’s end and then the seasonally weak first quarter before the market starts to rebound in the second quarter of 2023. The bank is using its projection to tout the shares of major Greek shipping company Star Bulk Carriers. But the potential benefit is clearly broader: Star Bulk is the only dry shipowner that Deutsche Bank currently covers after dropping most of the sector on issues of size and market capitalization years ago.

Star does have a large complement of 24 capesize bulkers that are especially attuned to iron ore imports, but any reawakening of the Asian market giant should trickle down to smaller vessel categories as well. Deutsche Bank shipping analyst Amit Mehrotra and Chris Robertson penned their take on shipping implications after the bank’s China macroeconomic team took a deep dive into the 20 measures announced by China earlier this month to relax Covid-19 restrictions. “While not a complete 180-degree pivot from its prevailing policies geared towards prevention and containment, this is an important policy tone shift that we believe will lead towards further reopening and fewer major lockdowns. Stronger Chinese economic activity in 2023 will be a key driver for dry bulk commodity import demand,” the analysts wrote.

One key point for the analysts is that local Chinese officials who implement overly restrictive practices such as lockdowns and factory closures will face “corrective measures”, they noted. “This seems a major tone shift towards prioritizing fewer lockdowns and more economic activity,” they said. Also of note is the prioritization of vaccines and treatment drugs, moving away from a strict policy of containment, they wrote. Still, little is expected to happen immediately. Even as China unveiled the plan, Covid cases were surging, topping the 10,000 mark for the first time since May as the colder winter months begin to take grip.

“We don’t believe further easing will occur until 2Q23,” Deutsche Bank projected. “Coupled with normal seasonality around Lunar New Year, dry bulk rates will likely remain under pressure during [the first quarter of 2023]. The pace of China’s ultimate reopening and economic stabilization will be a key factor in improving dry bulk commodity and tonne-mile demand for vessels.” The bank is thus recommending investors take advantage in the pullback in shares of Star Bulk, which is the largest publicly listed dry bulk fleet at 128 units.

Deutsche Bank has one of its top “buy” ratings across all industrial sectors on the Petros Pappas-led shipowner, citing a $40 price target for a stock that was trading around $21 on Monday. Star has traded as high as $33.99 in the past year. “We believe dry bulk carrier rates and asset values will trend higher over the next twelve months,” Mehrotra and Robertson wrote.

The dry trade may reap an additional benefit as Bloomberg reported on Friday that China is planning a broad rescue package to bail out a real estate market mired in a deep slump and deepening liquidity crunch, citing sources familiar with the matter.

Danish Ship Finance (DSF) says owners will have to get used to making less money from asset plays and more from actual shipping operations. In its six-monthly look at vessel markets, the finance house argues that producers of future fuels will need long-term off-take deals with shipping companies. A team of analysts led by Christopher Rex, head of innovation & research, said long-term ship charters will need to go hand-in-hand with these agreements to provide certainty around income. “Vessels that are committed to long-term contracts are less likely candidates to participate in a future asset game,” the report added. Value will be created through cash flow yields instead.

“That may sound extremely unattractive to many, as the cash flow yield from operating vessels has been a weak driver of value across vessel segments and business models over the past 15 years, except during short-lived periods of freight rate super-cycles,” DSF said. It warned that demand could decline if cargo owners are not willing to pay more for their transport, or if shipowners do not find a way to bridge the gap between costs and customers’ willingness to pay.

The price of the new fuels is expected to be much higher, possibly three times that of the cheap stuff used today, DSF believes. “The global market for greener fuels is immature and many of the services that are required for a spot market are not in place. The creation of new fuel markets is not a task for small or mid-sized shipowners,” the lender said.

The investments required to build scaled fuel production are huge. Producers will need a high degree of financial certainty from creditworthy counterparties to start building new infrastructure, DSF added. The shipping industry is capital-intensive, with a combined market value of the fleet above $1.4trn distributed among more than 100,000 vessels and 24,000 to 25,000 owners. The average shipowner has four to five vessels.

Building a new market for zero-emission bunkers could potentially be done by one of the large owners or across a group of owners through capacity sharing, DSF argues. But vessel operators could be cut out altogether by cargo owners or freight forwarders. “Once the cargo and the fuel profile are in place, the next generation of vessels can be ordered at scale,” DSF concluded.

Charter rates for LNG carriers have risen to fresh historic highs as assessments for spot levels smash through half a million dollars per day. The Baltic Exchange’s BLNG2g route from the US Gulf Coast to Europe is up over $12,000 per day to $509,908 per day. The US Gulf to Japan route BLNG3g is also closing on the half-million mark at $485,476 per day. Unseasonably high temperatures in northern Europe have kept a flotilla of LNG carriers hovering around receiving facilities and nearby anchorages. In addition, high gas storage inventories in Europe are lengthening wait times.

But despite the new record-breaking levels, brokers report that there are few spot fixtures being concluded despite the copious requirements for tonnage, particularly in the Atlantic. Affinity LNG summed it up as: “Another week of chasing shadows on LNG shipping as prompt requirements aplenty have largely failed to yield fresh fixtures.” The broker reports that those with LNG tonnage that could be sublet are proving nervous of releasing tonnage. One market report listed just four available prompt LNG carriers in the Atlantic, two of which were in a warm condition, and a further two warm ships in the Pacific. “With so little liquidity and so much at stake, the terms of seemingly similar deals can widely vary and don’t always correspond into a coherent market view,” Affinity said.

Brokers said the greater action is currently on period fixtures as charterers turn their attention to cover for the following year and winter. They point to the forward rate assessments which are showing six-figure levels across steam turbine, diesel-electric and two-stroke LNG carriers for November and December 2023. Owners and operators of tonnage have been seen trying to cash in on the continuing super-strength in the market. Portugal’s Galp was seen offering out its upcoming LNG carrier newbuilding which delivers in January for a six-month period. Similarly MISC’s 157,21-cbm TFDE vessel Seri Balhaf (built 2008), which is a relet from trader Gunvor, has attracted offers and may have been snapped up. ​Brokers also report that Gail (India) remains in the market for an LNG carrier to ship volumes from the US for at least a seven-year period or longer from 1 January.

Fearnley LNG said: “… the tightness in 2023 now seems to be written in ink. Charterers have been working their way through the term tonnage availability lists at such a rate that one wonders whether independent owners will have anything left to do next year?”

Speaking in a recent webinar Poten head of data analytics Kristen Holmquist said LNG supply is going to remain relatively flat in 2023. She forecast around 20 million tonnes of additional LNG supply representing a rise of around 4% will come to the market next year. “This winter is not the end of the issue for gas supply globally,” Holmquist said, with a warning that 2024 could be short, if not shorter than what Poten is seeing for 2023.

“2023 will bring more of the same for the global LNG market as export volumes will not increase substantially and Russian flow are not expected to resume,” she said. But on a positive note, she flagged up several new US liquefaction projects which could be nearing final investment decisions.

Clarksons Securities believes VLCC spot rates have much further to rise after storming past $100,000 per day for scrubber-fitted ships. Analysts Frode Morkedal and Even Kolsgaard believe fourth quarter vessel earnings could be the best for owners of big tankers since the second three months of 2020. The average rate then was $77,000 per day.

Listed shipowners have been reporting VLCC bookings for October, November and December $60,000 per day on average so far in the final three months. In October, Clarksons Securities had predicted VLCC rates would burst past $100,000. This happened by early November. Older vessels are earning $80,000 per day in the spot market.

“We believe that the tanker market’s capacity utilization rate is between 91% and 92%,” Morkedal and Kolsgaard said. They argue that a rise of just 2% in demand can hike VLCC earnings to $150,000 per day. This demand increase will be realized if the European Union’s seaborne crude oil imports from Russia of 0.75m barrels per day in October are moved on to longer hauls due to the impending ban, the analysts said.

“Although equities have performed well this year, we estimate that tanker equities do not price in more than $40,000 per day, and hence capture little to none of today’s strong rates,” they added.

The record-low orderbook, which implies essentially zero fleet expansion from 2024, still supports investment in tanker shares, the duo said.

“Despite oil prices nearing $100 per barrel, refinery margins have rarely been higher. This suggests that activity in the tanker market can remain solid even if the economy softens,” Morkedal and Kolsgaard concluded.

Energy Scan reported European gas consumption in October dropped 22% year-on-year, due to warmer-than-average temperatures. Fearnley Securities argues that for tankers, lower LNG demand probably means less gas-to-crude oil switching than previously assumed.

New daily coronavirus cases in China continue to surge.  Over the weekend new cases surged even further.  The last six days have each now seen over 1,000 new daily cases reported.  Today (14^th November) saw 1,794 new cases reported, which marks the largest number reported since April 29^th.

Also of note is that according to the Wall Street Journal and various other media outlets, China’s central bank and top banking regulator issued a wide-ranging series of housing market measures on Friday aimed at bolstering housing demand and supply.  The new measures are reportedly massive in scale and include extensions for loan and debt payments and a focus on increasing financing.  It remains to be seen, though, just how soon housing sales will be able to return to finding growth again.  China’s housing sales have contracted on a year-on-year basis for fifteen straight months.

Brazil’s iron ore exports suffered a record month on month decline in October; after a strong September (36 MMT) shipment programme exports plummeted by 9.3 MMT to 26.8 MMT. Cargo destined for China dropped 7.3 MMT month on month providing further evidence of slackening demand in the world’s largest consumer of iron ore whilst the 7.9 MMT shipped to the rest of the world was Brazil’s lowest monthly total since February (when heavy rains caused significant logistical disruption) and compares to a much stronger 9.2 MMT in October 2021.

In the first ten months of 2022 Brazil’s iron ore exports at 282 MMT are down 15 MMT (-5% y-o-y) on the equivalent period in 2021. Shipments to China at 192 MMT have contracted by 8 MMT y-o-y whilst cargo shipped to Vale’s Teluk Rubiah hub in Malaysia at 16 MMT have decreased 3 MMT(-16% y-o-y). Exports to Brazil’s other main customers in the Far East are largely static with Japan at 10 MMT and South Korea at 6.4 MMT, whilst in the Middle East cargo shipped to Vale’s pellet plant in Oman have marginally increased at 8.4 MMT though this is more than counterbalanced by a fall of nearly 1 MMT to Bahrain at 9.7 MMT. Exports from Brazil to Europe are all reduced with Netherlands at 6.3 MMT, France 3.4 MMT, and Italy 2.5 MMT all down about 5% y-o-y though there is a much sharper contraction to Belgium (minus 18% y-o-y) at 1.8 MMT, Germany down 0.9 MMT (-32% y-o-y) at 1.9 MMT whilst shipments to Spain nearly halved at 1.2 MMT.

Slack demand is reflected in the iron ore price which for November has ranged between $80-90 CFR for 62FE in comparison to $115-120 this time last year with prices peaking around $220 as recently as July 2021. Brazil’s mining companies are also facing a further potential setback as the new government of Lula da Silva is considering imposing tariffs on all iron ore production.

While not a reopening, China has eased some of its coronavirus restrictions including shortening quarantines by two days for close contacts of people infected with coronavirus and removing a penalty for airlines for bringing in too many people infected with coronavirus.  The easing of restrictions comes even as China experiences a surge in new cases.  1,209 new daily coronavirus cases were reported today.  While lower than the 1,346 new cases reported two days ago, this marks only the third time since April 30th that over 1,000 new daily cases have been reported (each of the last three days have now seen over 1,000 new cases reported).