Dry bulk owners were understandably feeling high-spirited this week. With the orderbook at historic lows, rebounding demand for minor bulks and coal as well as steady growth in iron ore and grain volumes, the dry bulk market is poised to enjoy a strong freight environment over 2021 and into 2022.

The rocketing capsize market led the Baltic Dry Index to its highest levels since September 2010.

Golden Ocean’s chief executive Ulrik Andersen said the capesize market in which it has most exposure was “firing on all cylinders” due to “hefty activity” on all the main trade routes, mainly driven by iron ore demand and growing Brazilian exports.

The BDI was at 2,889 points at the close on April 27, double that at the start of the year, while the Baltic Capesize Index closed at $37,453 per day, the highest since September 2019.

“We see today’s market as a sign of a fundamental change in the supply-demand balance and not a temporary spike,” Mr Andersen said. “It is clear that the stars are aligning for the owners. Couple the robust demand side with a 30-year-low supply growth, and you have the outlines of an attractive market situation, with a runway of a least a few years.”

Seanergy’s chief executive Stamatis Tsantanis said that capesize rates had room to move up further given that Brazil was only exporting half of its capacity, riding at 600,000 tonnes per day from all miners versus a nominal capacity of about 1.2m tonnes per day. Once Brazil normalises its shipments, the market could rise by 30% to 40%, or more, he said.

“We’re bullish and have been for some time, based on a vessel supply squeeze,” he said. “The market is starting to feel this lack of supply.”

The capesize surge coincides with a ramp-up in exports of grains from Brazil and Argentina.

The bull run for bulker markets could last for years to come — if shipowners can resist ordering new vessels, according to GoodBulk’s chief executive. John Michael Radziwill told TradeWinds on Tuesday that owners need to learn from their mistakes, “and our big mistake has always been to oversupply our market with newbuildings. This time, let’s try not to do it. Because if we don’t do it, we could be talking about a bull market in years and decades, instead of months and years as usual.”

Radziwill acknowledges that is something shipowners say publicly every time the bulker market is on the cusp of something exciting. But the difference this time is the historically low orderbook, which is at almost 6% of the live fleet, he said. Radziwill has good reason to be bullish. When TradeWinds spoke with him by phone on Tuesday, futures contracts for May were trading at over $38,000 per day and average daily physical rates were assessed at over $37,000. GoodBulk reported another profitable quarter that same day and has returned more cash to shareholders as the Capesize market continues its upwards trajectory.

Radziwill said the owner has the least forward coverage it has ever had going into the second half of the year, ready to seize opportunities in the rising spot market. GoodBulk recorded net profit of $3.1m — or $0.10 per share — for the first quarter of 2021, down slightly on last quarter but a marked improvement on the $5.1m loss it booked for the first three months of 2020. Revenue totalled $49m during the first three months, aided by strong earnings for GoodBulk’s 22 Capesizes and one panamax bulker. Its Capesize fleet logged an average gross time-charter equivalent (TCE) rate of $14,592 per day during the first quarter and its panamax earned $12,954 per day. A year ago, its Capesizes earned $10,851 per day on average and its panamax had income of $1,864 per day.

Around 75% of GoodBulk’s fleet — comprising 22 Capesizes and one panamax — is open with a daily break-even rate of just $9,000. The comeback in Brazilian iron ore exports has made all the difference to the Capesize market in 2021 so far, Radziwill said. He noted that bulker markets have also had a “big surprise” from China since December and have benefited from the country’s trade dispute with Australia over coal. “China is still consuming coal, even more so than they were a year ago. They’re more concentrated on economic production at the moment than anything else,” Radziwill explained. “Tonne-miles have grown because China is still importing and Australia is still selling. You get Australia selling into Europe or India, and China buying from Indonesia, Colombia and South Africa.”

Bulker markets are also being aided after the worst of the pandemic by national economic stimulus plans around the world, supporting demand for both hard and soft commodities, he added. The company has made another quarterly “capital repatriation” payment to shareholders of $0.34 per share, the same level as in the previous quarter. Radziwill told TradeWinds that with this latest dividend, GoodBulk has paid out almost 50% of the original investment made in the company, which was $10 per share in April 2017. He said the firm is “pretty happy” with what the company has been able to achieve with its dividends over the past four years, considering that the world has suffered a pandemic and major disruption in the supply of iron ore from Brazil.

Talk of dividends and the positive outlook for bulkers naturally begs the question that TradeWinds has asked Radziwill so many times before: where does this leave GoodBulk’s plans for an initial public offering? The company, he said, remains on the lookout for potential opportunities but for now will stick with the formula tried and tested by his grandfather, John M Carras. “We’re looking at all options and we will go with the one that we’ve come to a well-founded conclusion benefits shareholders the most,” he said. “What’s nice about this portfolio is we adopted a low debt, high-dividend payout model when we started, which is something that my grandfather has been doing for almost 100 years,” Radziwill said.

In mid-2018, GoodBulk was forced to pull its $140m IPO in New York because investor interest did not meet its price expectations. Its securities are presently listed in the over-the-counter market in Oslo. GoodBulk saw an opening in the market at the end of March to buy back treasury shares at a discount to its net asset value, Radziwill said. The firm bought 20,100 of its securities on 24 March, bringing the total of treasury shares it holds to 541,464. “We said we would look at increasing our exposure, provided we could get, let’s say, ‘distressed’ pricing, very low pricing,” Radziwill explained. “We were able to achieve that for a small portion of our stock that was trading on the Norwegian over-the-counter exchange.”

According to industry sources, China’s National development and Reform Commission has reportedly started directing custom authorities to release more import quotas.

The development follows recent news on a potential shortage ahead of the busy summer months, when increased air-conditioning tend to elevate coal demand.

Clearly a positive, the development marks a shift in China’s stringent import quota control system and could provide near-term support to dry bulk freight rates.

An 11-year high in the Baltic Dry Index (BDI) had a quick impact on US-listed bulker stocks, helping shipping reverse two weeks of losses. Bulker shares under the coverage of US investment bank Jefferies soared an average of 17% last week, spearheading an average 4.2% rise for the 32 listed companies under its coverage.

The gain outpaced a loss of 0.1% for the S&P 500 and a rise of 0.4% in the small cap Russell 2000 index.

The BDI hit its highest levels since October 2010. “Capesize rates are about $35,000 a day while supramax rates are close to $23,000 a day, with the FFA curve pointing to further strength,” said Jefferies analyst Randy Giveans.

“As a result of the ongoing improvement in spot rates, time charter rates, and secondhand asset values, we are increasing our NAV estimates and price targets for all dry bulk companies under coverage.”

The week saw six of the top seven climbers be dry bulk operators. Genco Shipping & Trading, which announced a new high-dividend strategy, led the way with a 19.1% hike, but was followed closely by Safe Bulkers with the same number, Eagle Bulk Shipping at 18.9%, Diana Shipping at 18% and Navios Maritime Partners at 17.9%. Star Bulk Carriers also gained the top 10 with a 10.6% jump.

No other shipping operating sector came even close to matching dry bulk’s gains. LNG and LPG operators both gained an average 3%, with containerships edging up 2%. Tankers fell back 1% as most rates dropped.

Giveans is looking forward to the onset of earnings season as yet another catalyst in the coming weeks.

Keeping up the momentum

Grain loadings in South America are finally ramping up, bolstering Panamax freight as the US’ presence starts to wane. This should help to sustain demand through Q2, but some risks remain for the second half of 2021.

Seasonal boost in ECSA

After a slow start to the year, the pace of grain shipments from East Coast South America (ECSA) has finally picked up. As the soybean export season commences, Brazilian agribulk exports on bulkers totaled almost 18.5 MMT in March, up by 10% YoY, although weak activity in the months prior mean that shipments over Q1 are only 2% higher YoY. Argentinian grain liftings also strengthened in March, jumping by 23% YoY to 7.7 MMT, but total volumes over Q1 still fell by 2% YoY.

Exports from these two countries brought total ECSA shipments in March just shy of May 2020’s record of 26.2 MMT. Based on shipments so far this month however, April shipments are on track to hit an all-time high of 27.8 MMT, marking a 14% increase YoY.

This has naturally benefitted the Panamaxes, which haul the majority of the grains from this region, but the smaller ships have not missed out. Supramax cargoes in April are on track to surpass 5.5 MMT, up by  31% YoY and the highest since mid-2019.

US still in the market

We have almost become used to these impressive growth figures from South American grain shippers, but in contrast to the last couple of years, they are currently competing with elevated volumes from the USA, who are still enjoying the tailwinds of a bumper export season. A surge in Chinese demand over the last six months helped to push US grain exports up by 69% YoY, buoying rates on both the country’s Pacific and Atlantic coastlines. This includes record purchases of corn to restock depleted supplies.

Although we’re coming to the tail-end of the US’ exporting season, the pace of shipments remains high relative to last year. April volumes are on track to surpass 11.1 MMT, up by 17% YoY, but exports from the Pacific Northwest region, where cargoes are predominantly Panamax stems, are trending 23% higher YoY.  This, along with a recent boost in Pacific coal activity, is helping to keep Panamax tonnage in that basin, and freight rates high. And, as we wrote a few weeks ago, this effect is also seeing ships having to ballast further on average to reach cargoes in the Atlantic, tightening the market to a greater degree.

Inefficiencies

Part of the reason why ECSA grain shipments climbed so rapidly last month is because of delays in the harvesting of this season’s soy crop earlier in the year, which saw shipments over January-February slow by around 10% YoY. Because of these delays, the usual build-up of tonnage in the region for the time of year has taken longer to clear, tightening supply elsewhere. Queues of empty Panamaxes in Brazil, for example, hit an all-time high of 4.4 MDWT at the start of this month 66% higher than average for this point in the season.

Panamaxes loading grains in ECSA in March waited on average 17.5 days to load, six days more than average for this month over the past four years and the longest average waiting time since 2016. Supramaxes also waited around six days longer than average in March, though average durations were still shorter than June 2020’s peak.

Risks ahead

These inefficiencies and strong cargo volumes in both basins have helped to propel the sub-Cape markets to their highest levels in a decade, and we expect the South American grain crop to keep the momentum going through Q2. However, as we move into the second half of the year, there are some factors to watch that may be signaling a cooling in the market.

The first and most significant of these is Chinese demand, which accounted for a third of bulker employment in the grain market last year. As its pig herd recovered from Swine Flu and domestic grain supplies were hit by bad weather last year, China hoovered up record quantities of soybeans and corn from the US and, more recently, Brazil. By the start of this year, China’s appetite for soybeans had sent prices to their highest levels since 2014, and pushed crush margins to all-time highs. In the past few weeks however, demand seems to have waivered.

Prices have continued to rise, but crush margins have collapsed, briefly turning negative in March for the first time since 2019 as soybean meal in China moves into oversupplied territory. Following the binge on American agricultural products, 38m tonnes of grain arrived in Chinese ports over Q1 this year, 59% higher versus imports over the same period in 2020, and this is beginning to weigh on the animal feed markets. At the same time, we have passed the peak season for pork consumption in China, so demand will likely remain subdued until herds are rebuilt. With the majority of South America’s crop also heading to China crush margins could be weighed down further.

Recently, China has also hinted at measures to reduce the share of imported soybeans and corn in its animal feed mix, prompted by the soaring cost of relying on seaborne supplies. These suggestions have not been implemented yet, but could pose a further threat to imports later in the year, especially for corn, which the country only began buying in significant quantities last year. Further, the hefty purchases from the US may not be sustained over the 2021-22 marketing year if Chinese stocks are sufficiently rebuilt in the coming months.

Meanwhile as the queues in Brazil unwind, we also expect to see less support to the market from this inefficiency. Congestion has already fallen by more than 1 MDWT from its peak at the start of the month, and if it continues to slide in the usual seasonal pattern, it will have halved by July. As this happens, and as more vessels open up in the Far East after discharging, we could see some heat taken out of the market.

Nick Ristic

Capesize freight rates are firing, propelling the Baltic Dry Index to 10-year highs with capes at their highest seasonal level since 2008 – the final few months of dry bulk’s last bullrun. Capes climbed $4,638 on the Baltic Exchange yesterday to close at $33,290 per day, triple the 2016 – 2020 average for this time of year, with rates continuing to surge today.

“Vale has been fixing tonnage left, right and center for the C3 between Tubarao to Qingdao, involving between 5 to 8 vessels, amidst tonnage for carriage of iron ore from Ponta Da Madeira to Rotterdam,” brokers Lorentzen & Stemoco noted about Brazil’s top miner today. Activity in the east is also strong with Rio Tinto and BHP very active in the market.

Another Norwegian broker, Fearnleys, described the cape markets this week as being “in flames. It’s not only the very profitable iron ore trade being active but also the coal segment is keeping itself busy adding gasoline to the fire,” Fearnleys added in its pyrotechnically themed dry bulk report.

Growing Chinese coal demands was something also picked up this week by UK broker Arrow. “China appears to be short coal, supply gaps are trying to be filled by turning to the seaborne market and snapping up lots of Indo coal and even stretching out to Colombian and rarely taken South African,” Arrow pointed out in a new coal report. “With the peak power demand season approaching and land based supply of coal hindered, seaborne coal demand looks set to rise and could be the dark horse of the dry cargo market in 2021.”

Capes are not the only dry bulk segment powering to big profits this month. Peter Sand, BIMCO’s chief shipping analyst, commented: “Now, the force of the Chinese dry bulk imports, powered by economic stimulus, is once again fuelling the economic recovery that was shattered by the Covid-19 pandemic in China and lifting the whole dry bulk shipping market. The impact of China’s economic stimulus has not only lifted the freight rates for capesize ships. In fact, you currently see earnings across all dry bulk sectors that have not been seen stronger since 2010.”

Cleaves Securities, meanwhile, has predicted the dry bulk run could push on for the next couple of years. “Given the historically low orderbook, very limited demand growth is needed to significantly improve fleet utilization and potentially push dry bulk earnings into super-cycle territory going forward,” Cleaves stated in a report out earlier this week. Cleaves’s high case scenario sees capes averaging $70,000 a day in 2022.

Freight rates for Capesize bulkers in various trades have risen to their highest levels since last October, with continued cargo flows from Brazilian and Australian miners supporting the recent rally in the iron ore price. The bullish momentum can be seen in both the Atlantic and Pacific Basins, where vessel supply was tightening amid continued fixtures of May-loading cargoes, said a Singapore based Capesize broker.

The average weighted time charter on the Baltic Exchange was $28,652 per day at the close on April 20, from $26,055 a week earlier — an increase of 10% and the highest in six months. The Baltic Capesize Index, the industry benchmark, gained 313 points to 3,455 points on April 21.

Breakwave said a continued strong global recovery in steel demand would benefit the dry bulk sector, with iron ore volumes for seaborne transportation remaining strong and supporting freight rates, especially for the larger tonnage.

“Output from the world’s top iron ore producer, Brazil’s Vale, is expected to recover to normal levels during the latter part of the year, following earlier mining accidents, contributing to a higher tonnage demand,” the shipping consultants said in a report.

Recent Chinese customs data have also shown a healthy increase in iron ore imports by the world’s largest steel producer as output picked up, with volumes surging to a five-month high in March. Meanwhile, plenty of tangible short-term factors are currently keeping things tight in the Capesize market, according to Braemar ACM.

One of these is the minimum ballast requirement that is still in place on some trades. Ships must be at sea for 14 days from their last port before they are allowed to call at an Australian port. This has been in place since early last year to limit the spread of coronavirus in the country. “The result has been a sustained increase in time spent ballasting or waiting to load for ships performing C5 trades,” Braemar analyst Nick Ristic said in a note.

“This is the single most important route for the Capesize market, accounting for almost a third of employment last year, so inefficiencies here can have great implications for the wider market.”

The Baltic Dry Index (BDI) reached its highest point in more than a decade, breaking 2,700 points for the first time since October 2010. The BDI came in at 2,710 points on Wednesday, thanks to Capesize bulker spot rates taking a huge leap amid China’s heightened demand for high-quality Brazilian iron ore.

“As reported by Platts, the strong steel prices, and the sintering controls in Tangshan, are resulting in mills favouring higher-quality iron ore fines, which should be supportive of particularly Brazilian output, in our view,” Clarksons Platou Securities wrote in its daily dry bulk market note. “Coal trades are also performing well, supporting both capes and Panamaxes.”

Coal exports from South Africa jumped 63% week over week to 1.8mt, while US shipments jumped 45% to 2.6m tonnes, Clarksons noted. The Capesize 5TC, a weighted average of spot rates on five key routes, jumped 25% on Wednesday to $33,290 per day, according to the Baltic Exchange.

“Fixture and trading information was heard swirling throughout the day as widespread valuations and insinuations fanned the flames keeping the market on a boil,” the Baltic Exchange wrote on Wednesday. “Post index brought some silence but momentum will surely continue to push capes to year highs.”

NYK Line has hired the 180,184-dwt Elizabeth II (built 2007) at $33,290 per day for a 10-month to 12-month fixture in the Far East starting in June. “With strong steel prices, iron ore trades are expected to be well supported going forward,” Clarksons wrote.

“Australian miner BHP today guided that annual iron ore production is now expected to be in the upper end of its forecast of 245 mt to 255m tonnes.”

The recovery of shipping markets after the COVID-19 pandemic will be unlike the post-economic crisis recovery, according to multiple shipping analysts. Speaking at an ask the analyst session at the Sea Asia Virtual Preview event, Khalid Hashim, managing director of Precious Shipping said the fundamentals for the dry bulk market were very different compared to the post-2009 crash period and the market lows seen in 2016. Hashim said that the pandemic had made predicting and analysing trade demand incredibly difficult.

Clarksons pegged world dry bulk demand growth at 4.36% for 2021 and while that estimate was higher earlier in the year, Hashim expected it to rise again as the year progressed. That demand growth compares to net fleet growth expected around 1.7%, and a low orderbook to fleet ratio of 5.75%. In the wake of the financial crisis in 2009 the orderbook to fleet ratio was 80.49% and net fleet growth was 9.23%, leading to a period of worsening oversupply, “this time, it’s different,” he said.

In the first quarter of 2021, dry bulk time charter earnings had risen compared to the 10-year average for the first quarter by 85% for Capesizes, 98% for Panamaxes, 79% for Supramaxes and 102% for handy sizes. Another supporting factor for the dry bulk market in 2020 was a significant stimulus package from Chinese authorities which raised steel demand. In 2021 the market will be supported by global stimulus spending of over $20 trn, said Hashim.

For the container market, Tim Power, Managing Director at Drewry said that 2020 was a wild ride as the pandemic caused supply chain inefficiencies and consumer demand for durable goods rose in the US. The outlook was positive, he said.

“The fundamentals are there for this industry to be sustainably profitable for ever more,” said Power.

The container sector is still recovering from the disruption caused by port delays and equipment shortages, and what happens next is up for debate, said Power. There are signs that the current profitability of container lines will remain through 2022, albeit falling as inefficiencies are worked out, loosening capacity. “The fundamentals of container shipping until this year have always been rubbish. You have economies of scale which mean overcapacity, you have perishability, high operational gearing… a totally fragmented market and an inelastic demand curve. It’s a recipe for disaster,” said Power. “That’s now changed. Economies of scale have run out, the industry is more concentrated and now the inelastic demand curve works for you as has been amply demonstrated. The question now is, can the lines mess it up now that the fundamentals are right?”

A return to ego-driven massive ordering and fights for market share could still ruin those improved fundamentals, said Power. MSC has 35 ships on order totaling around 600,000 teu, around a third of the total orderbook capacity. In the past, Maersk would return fire with their own ordering spree, but “they aren’t at the moment. Maybe that’s because they’re saying ‘we are not in the business anymore; we are going to become an integrated logistics player and we’re not just chasing share like the old days’. Let’s see how long that lasts,” said Power

The pandemic also had a profound impact on the underlying trade flows for the tanker market, said Anoop Singh, Head of Tanker Research, Braemar ACM Shipbroking. Singh believed that by the end of this year, demand for oil will outstrip supply from OPEC and lead to the body raising output. This should bring improvements for suezmaxes and VLCCs as increased supplies to the west mean loaded voyages in both directions. Tanker markets will also feel an early impact of the global energy transition, said Singh, as he believes both US gasoline demand and EU diesel demand have peaked. “As that demand passes its peaks, we think refining throughput in the US and Europe will continue to decline at a faster rate than crude production changes,” said Singh. Beyond the short term, Singh expects a mid-decade peak in fuel demand in China, leaving India to take the lead in demand for oil fuels.

James Frew, Director of Consultancy, Maritime Strategies International spoke on the decarbonisation challenge facing the maritime industry. MSI expects LNG to grow in use as a fuel through to 2030 when it will begin to lose market share to zero carbon solutions like ammonia and hydrogen fuels. Cargoes will also decarbonise, said Frew, with combined cargoes of gas, oil and coal peaking in 2035 before starting a steep descent.

Chinese crude steel production totaled 94 MMT in March, rising 19% YoY and marking the second highest monthly total on record.

This brings production over Q1 to 269 MMT, up by 15% YoY, though this is in part a reflection of weaker output during the country’s Covid-19 outbreak. Economic activity since recovered and continued to drive growth in steel output.

Chinese steel exports saw their highest monthly total since 2016 with 4.3 MMT of steel heading to foreign buyers. Supras have been the primary beneficiary of this trend, with these ships accounting for 70% of all steel exports in March, rising 92% YoY to 3.1 MMT.

We expect Chinese steel output to remain strong over Q2, but to come under further pressure from regulators later in the year.

One of the drivers of increased steel output is China’s construction and property sectors, which saw activity continue to grow in March.

Fixed asset investment in infrastructure increased by 31% YoY in March for the second month in a row as stimulus continues to move around the economy.

Initiated floor space of newly started houses increased 30% YoY in March rising to 271m square meters, aided by a 26% YoY jump in investment in real estate.

Despite reports suggesting the People’s Bank will tighten lending restrictions in the near future, new loans in March totaled 2.7 trillion yuan, flat YoY.

This brings Q1’s total new loans to 7.7 trillion yuan, up by 8% YoY, though we expect conditions to tighten later in the year.