Japan’s Nisshin Shipping has ordered up to 10 Kamsarmax dry bulkers in China as appetite for fresh tonnage in the sector appears to be increasing. These 82,000 dwt newbuildings are scheduled for delivery by August 2023, builder Jiangsu Hantong Ship Heavy Industry said in a statement. Shipbrokers said the contract includes a quintet of firm units, plus five optional bulkers. The vessels, which could be fitted with scrubbers, were priced at more than 27m each.

Ordering activities have been slack in the dry bulker sector this year, a sharp contrast with the spirit demonstrated by boxship owners. The latest Lloyd’s List Intelligence data shows fewer than 30 dry bulkers have been ordered since the beginning of 2021, compared with more than 600 in 2020 and 340 in 2019. However, the Nisshin deal and a series of recent orders have fueled speculation that investors’ confidence may be improving with a strong recovery seen in the freight markets this year.

The Baltic Dry Index, a measure of shipping health for bulk carriers, had reached a five-month high in mid-March primally driven by surging Panamax and Supramax rates. It remains at a high level now albeit with a few corrections.

“We’ve already started to see deals bubbling under the surface,” said a Hong Kong-based broker from a leading brokerage house. The momentum is also fueled by a cooling secondhand market, where quality assets are becoming scarce with owners now reluctant to sell or further raising prices amid high vessel earnings, he said. “So, the investment interest could be gradually shifting to the newbuilding market, although it will of course depend on how long the bullish freight market can sustain.”

In addition to Nisshin’s deal, several dry bulker orders were reported by brokers earlier this month, consisting of nine firm ships ranging from Capes and Ultras. “The resuming corrective mode noted in freight earnings coupled with the increases seen in asset prices have not completely cut [ordering] interest, as confidence seems to still be robust.” said Allied shipbrokering in a recent report.

However, some market observers pointed to the soaring newbuilding prices as a key damper on owners’ ordering enthusiasm for the time being. A new Kamsarmax, for example, now costs nearly $30m to be built at tier-one Chinese yards, up from $24m in July, according to Hong Kong Hainer Ship Trading chief executive Jimmy Miao. “The ship price could rise further with the ramp-up of steel price.” he said. “This could to some extent deter investment in newbuildings.”

Brazilian soybeans exports in the first three weeks of April surpassed the year-ago level due to higher exports in the third week of the month, sources said April 20, which is likely to support domestic oilseed prices. According to the foreign trade department’s report released April 19, Brazil exported 10.6 million mt of beans so far in April, compared with the equivalent 2020 volume of 9.16 million mt. Brazil exported 5 million mt of beans in the third week itself, compared with 3 million mt for the same period in 2020.

According to market analysts, almost 90% of Brazil’s soy shipments have been headed to China in April, especially in the third week of the month. This trend contrasted starkly with the first three months of 2021 for Brazilian beans exports, when shipment volumes were very small.

Typically, Brazil supplies over 80% of its soy shipments to China between February and July. However, harvest delays in the South American country coupled with slackening crushing activities in China have meant lower-than-expected soybean exports to China.

High soy prices and low crush margins have forced many China-based crushers to operate below capacity since January, analysts said. The average gross crush margin for the world’s largest soybean importer was assessed at $1.98/mt in March, compared with $16.60/mt the month before, S&P Global Platts pricing data showed.

In addition, there were concerns among the China-based crushers regarding the rising cases of the African swine fever. According to market sources, soybeans demand in China remained low as downstream hog farms experienced hog losses due to the swine fever.

According to average market estimates, Brazil is expected to produce a record 134 million mt of soybeans in the 2020-21 marketing year (February 2021-January 2022) and export an all-time high volume of 85 million mt.

According to a draft rule from China’s National Energy Administration (NEA), the country will seek to increase its power generation from solar and wind to 11% of total energy consumption in 2021, from 9.7% in 2019. YTD, we estimate Wind and Solar’s share of total electricity production at 9.4%.

In addition, the statement revealed China’s medium-term goal for solar and wind, set to reach 16.5% of total power use by 2025. For non-fossil fuels in primary energy consumption, the country aims to reach a share of 25% by 2030.

In our view, the announcement highlights China’s path towards a greener energy mix, with the near-term goals (i.e. 2021 and 2025) potentially speeding up the process as local authorities enables measures to reach these goals. For example, industry sources claims that local authorities have urged developers of solar and wind capacity to accelerate construction, whilst local governments have been asked to guarantee electricity generated from the plants to be able to connect to China’s grid.

In our view, the statement is largely in line with what has been previously communicated from the country, but near-term goals paint a firmer road towards these objectives.
 
Chinas thermal electricity production is up 22.4% so far in 2021, and has YTD accounted for 75.5% of total electricity production, which compares with 74.2% for the comparable months of 2020 and 75.6% for 2019. China is still struggling to reduce its dependence on thermal energy sources, with recent initiatives from Chinese authorities reading as an effort to increase the velocity of the transition.

In our view, the initiatives could displace seaborne coal volumes but recent trends still indicate reliance on necessary fossil fuel imports. However, we highlight the uncertainty related to China’s huge domestic production and future import quotas as the main determinants for seaborne imports of coal.

Cleaves Securities, the number one shipping analyst in the world according to Bloomberg, issued its quarterly shipping report today and the message to dry bulk owners wondering if they’ve missed the boat on acquiring tonnage is to buy, buy, buy. The 316-page report, led by Joakim Hannisdahl, puts dry bulk as Cleaves’s top investment pick.

“An unseasonal high earnings environment and a sudden influx of capital into dry bulk shipping equities have propelled our dry bulk share index to multi-year-highs. The orderbook is record-low, and only marginal demand growth is needed to improve an already strong sentiment,” Cleaves noted, adding: “Super-cycle is a strong expression, but the probability is increasing each day at the current newbuild ordering trend.”

Cleaves is forecasting its dry bulk share index to potentially gain 111% over the next year and grow by 165% over the coming two years.

Many owners have been questioning whether asset prices have leapt too far this year for them to get in on the booming market, but Cleaves clearly thinks there is still plenty of upside to come. Secondhand values surged in Q1 with Cleaves’ dry bulk asset price index up 19% quarter-on-quarter, led by Panamaxes and Supramaxes. Cleaves sees further upside to its asset price index, potentially up by 59% by Q2 2023 (see chart below).

Speaking with Splash today, Hannisdahl, head of research at Cleaves, said that in addition to the “great opportunities” to be had in the secondhand market, canny players might look to make some resale plays. “Despite yards’ backlogs having improved and steel prices being higher, I think newbuilds offer an attractive alternative with relatively early delivery slots still available,” Hannisdahl said, adding: “I surely hope investors continue to refrain from ordering too much, but with resale prices likely moving higher over the next two years, one could always unhand the newbuild before delivery.”

China’s National Bureau of Statistic’s released its monthly production figures for March. According to these, relevant production statistics showed a strong trend for GDP growth, coal consumption and steel production.
 
March saw Chinese electricity production follow its normal seasonal trend as 662.3bn kWh was produced, which is up 19.2% YOY and 12.3% MOM. YTD, electricity production is thus up 20.4% YOY.

Relevant for dry bulk, China’s thermal electricity production during March was 498.9bn kWh, which is up 26.6% YOY and 12.0% MOM. YTD, Chinas thermal electricity production is up 22.4% and has YTD accounted for 76% of total electricity production, which compares with the 2018 to 2020 share of 73%, 72% and 71%, respectively.

China’s domestic coal production, which has been rumored to be suffering from severe inspections following a series of accidents, rose only 3.5% YOY whilst being up 20% MOM. YTD, China’s coal production has risen by 16.9% YOY, and has thus been severely outpaced by the country’s thermal electricity production – in our view a positive for dry bulk owners, as it would suggest further pressure on Chinese coal inventories ahead of the summer peak.
 
During March, China’s steel production rose by 20.4% YOY and 15.7% MOM. YTD, China’s steel production has followed its usual seasonal pattern, albeit at an elevated level, and is currently up 15.6% YOY.

Pig iron production (raw material for making steel) has followed suit and reads as a strong positive for continued demand as March production figures were up 13.1% YOY and 11.0% MOM. YTD, Chinese pig iron production is up 10.6% YOY.

The price of steel has increased to its highest level since the 2008 financial crisis due to acute coil shortages in Europe and the USA. The situation seems unlikely to change until steel production picks up in the second half of the year. Consequently, increasing export opportunities will prevail in Q2, attracting the interest of Asian mills.

In the US, the price increase is deemed to be due to supply side issues, while in Europe, it stems from a combination of strong downstream demand and supply side shortages. Since the start of the year, prices in the US for hot-rolled coil have risen by 33% and prices in Europe have increased 37%.

The absence of US import tariffs on Korean products is already translating into an increase of steel exports to the US. Meanwhile, Japan forecasts its exports will increase 21% on the year for Q2.

Concerning European steel, India’s involvement is expected to grow, as despite having already exceeded its EU quota, they expect more steel to be allowed in.

China is also looking to supply the world steel market gap; however, their intentions are unlikely to last as they similarly expect domestic prices of steel to increase due to reduced domestic output.

Steel production is slow to recover after the lockdown, and with more moving parts, export opportunities are expected to remain well into Q2.

Tightening up

The Capes have finally joined the smaller vessels in an unseasonal rally, surging to the highest levels since last October. Cargo volumes have been solid, but inefficiencies and sentiment are also driving this rollercoaster.

The bulls are back in town

Capesize rates surged this week, late to the party that the Panamaxes and geared ships enjoyed last month. At the time of writing, the Baltic Capesize index stands at $28,056/day, almost three times higher than average for this time of year, though still shy of last October 2020’s peak. The rally has been driven by the Pacific basin. Since the start of March, our assessed TCE on an Australia – Far East round voyage (C5) has held an average premium of more than $4,000 against the Brazil – Far East route (C3), currently standing at $29,355/day ($31,982/day for a scrubber-fitted ship).

The FFA market has been even hotter, in turn fueling the physical market in a virtuous cycle. May futures hit as high as $31,600 today, more than doubling since the beginning of March. But optimism in the paper market seems to stretch beyond the front months and even contracts for the next few years have seen sizeable gains. Cal22 futures are currently trading at $18,725 gaining over $4,750 since the start of the year.

Inefficiencies mounting up

As commodity prices soar across several markets and vast amounts of stimulus is pumped into the global economy, some have taken the ongoing rally as a broader cyclical reversal in freight, while others see the recent movements as inflationary in nature. However we also see plenty of tangible short-term factors currently keeping things tight.

One of these is the minimum ballast requirement that is still in place on some trades. For example, 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 Covid-19 in the country. The result has been a sustained increase in time spent ballasting or waiting to load for ships performing C5 trades. 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.

Since the minimum ballast requirement was imposed, Capes on C5 trades spent on average 24 days ballasting towards or waiting outside Australian ports. This contrasts a fairly stable average of 20 days in the years prior to 2020, with vessels either slowing down during the unladen trip to Australia or waiting offshore for an extra couple of days. The logistics of crew changes during a pandemic have added to these inefficiencies. Many Capes have been able to perform these changes in the Philippines, a relatively convenient stop-over on Pacific round voyages, but the visit resets the clock on the 14-day quarantine, meaning ships which have changed crew on a ballast voyage have had to wait even longer off Western Australia.

These additional days add up, artificially constraining supply. Queues of empty Capes at Australian ports have averaged 12m dwt since the rules were introduced, double what they averaged pre-Covid, while the effect of ships slowing down on ballast legs has further tightened the market.

Our demand-side modelling indicates that Capesize demand per tonne of cargo moved on a C5 trip has increased by 8% since the start of 2020, before which this metric was fairly stable. In other words, it now takes about 8% more ship capacity to move the same quantity of cargo on C5 versus before the pandemic.

Again, because of the quantities of iron ore involved, these incremental changes have large consequences. If we plot the vessel demand we have actually measured on this route against what demand could have looked like without the Covid disruption, the inefficiencies translate to an ‘extra’ 5.6m dwt of Cape tonnage required on C5 since mid-2020, about 3.5 vessels per month.

On a global level, ignoring any other inefficiencies that have emerged during the pandemic, we estimate that these effects have provided roughly a 1.5 percentage point boost to total Capesize utilisation since mid-2020.

Trade flows

Volumes of trade over the last few months have been mixed. Shipments from the major miners in Australia and Brazil have been steady, and grew by 5% YoY in March, but the pace has since weakened and they are on track to fall both MoM and YoY in April. The trades which did well in March were actually the smaller ones, and they are on track to keep growing this month. India saw record levels of Cape exports in March, as high iron ore prices drove a surge in sales to China. March was also extremely strong for Russian coal shipments on Capes, which hit a record 3.4m tonnes, more than double YoY, driven by a boost in liftings from Vanino and Taman. Meanwhile, other coal exporters also saw a jump in Capesize exports last month, with Indonesian shipments jumping by 67% YoY to 5.7m tonnes and South African volumes rising by 77% YoY to 3.6m tonnes. All of these smaller trades combined have helped to tie up fleet capacity and support rates.

Yard visits

Since the boom in scrubber retrofits in early-2020, we haven’t written very much about shipyard activity, but the volume of Capesize tonnage in yards has gradually edged upwards so far this year, constraining the fleet further. There is currently 6.9m dwt of Cape capacity in yard, up by 46% MoM and the highest since July last year. In contrast to 2019 and 2020, the vast majority of these ships are not fitting scrubbers and are instead mostly units requiring special surveys. 2011 was the biggest delivery year for the Capes, and this year, 28% of the Cape fleet turns five, ten or fifteen years old, requiring a yard visit. This amounts to 517 vessels versus 449 last year.

Looking forward, we’re expecting many of these tightening effects to remain in the short term. These should continue to provide support to the market and keep freight rates elevated.

Nick Ristic

Two days ago, the FFA market for Capesize and Panamax vessels posted large declines but has since recovered with next month FFA’s currently quoted at USD29.8k/day and USD20.9k/day, respectively, versus current spot rates of USD28.1k/day for Capes and USD18.8k/day for Panamaxes (BPI 74).

Capesize spot rates posted a 7.4% gain today, continuing the positive momentum, while Panamax spot rates were up 11.6% today and 7.8% yesterday, having broken their consecutive deteriorating trend from the USD26.2k/day peak in mid-March.

All in all, the recent uptick further strengthens the positive development for the dry bulk freight markets as the bullish momentum continues into Q2 after a surprisingly strong Q1 – which traditionally is low season.

Shipping has enjoyed the best three months of business for 13 years, with soaring rates and a bounceback in world trade. This exhilarating performance — as measured by Clarksons Research — appears to bring the industry back to the golden days that ended in 2008. That year, the financial crash hit. The US and then the world woke up to the risks of a reckless lending binge and over-exuberant stock markets. That pile-up led to a nuclear winter of bankruptcies, state bailouts and ferocious austerity programmes to rebuild public finances.

So, are we about to push the global economy off a cliff again, in a similar state of overexcitement? Clearly not. Some people would definitely argue that record stock market levels in recent months are not justified, but conditions nowadays generally are quite different. The strong reasons for optimism come after a dreadful period of Covid-induced lockdowns, trade downturns and business failures. But, as we know, the wider traumas of 2020 that drove oil prices to zero had a mixed impact on shipping. Global trade dropped by between 4% and 5% — depending on whom you ask — but freight rates, as measured by Clarksons, were down only 2% last year.

The cruise industry — not counted in the ClarkSea Index — was devastated and offshore shipping mauled. But tankers had a wonderful year as vessels were snapped up for storage as well as trading dirt-cheap crude. The container industry made a fortune by holding back capacity and seeing freight rates soar. Dry bulk was miserable as the China growth machine stuttered in the face of the pandemic. But the first three months of 2021 were tremendously good, according to the ClarkSea Index, which measures tanker, bulker, containership and gas ­carrier earnings. The average freight rate price per day to 31 March was $17,461, which is strong, but only half the $34,035 recorded in 2008. And, even when banks such as Lehman Brothers began to topple 13 years ago, shipping freight rates were not far short of $16,000 by the end of 2008.

The current “boom” in the index has been driven not just by trade levels recovering after the worst of Covid. Earnings have also increased due to logistical breakdown caused by port and canal congestion as the world rapidly restocks. Since the end of March, the forward momentum has increased, although it began to falter slightly last week. The tanker market is now in the doldrums, with over-tonnaging in many sectors and ING Bank predicting more gloom. However, a bright spot could come from the renewal of talks between the US and Iran on the collapsed nuclear deal. US President Joe Biden has signalled his desire to see a new agreement, which could end sanctions and open the way to more Iranian oil exports. Gibson Shipbrokers has estimated this could bring work potentially for 45 VLCCs and suezmax tankers. Equally, an incident at the Natanz nuclear facility near Tehran last weekend highlighted the dangers of changing political ground rules in the Middle East. And oil demand remains fragile: Virgin Atlantic airline expects business travel to remain 20% lower for the next two years than it was pre-Covid.

Dry bulk is going through a much better period, with the Baltic Dry Index up at 2,145 points, driven by strong capesize interest. Chinese imports of coal and iron ore for steel-making should drive the way for the rest of the year. Shipping stocks on Wall Street have risen by almost 40% in the first quarter, helped by a wider market confidence on the back of a huge US public spending package and the prospect of further low interest rates.

Israeli containership operator Zim, whose shares had a catastrophic first day of public trading at the end of January, has seen its market value double. It is now worth $3.5bn. Let us stick to that as a positive pointer to the future.

China will continue to be the biggest influence on bulker markets in the second half of 2021, but potential impacts from its changing political priorities remain a mystery. Analysts expect slower growth in dry freight markets in the second half — but demand for shipping will remain strong. During the first quarter, the sector benefited from returning trade, firm grain volumes, strong Chinese imports, a pick-up in coal demand and port congestion. This led to the strongest quarterly average bulker earnings in more than a decade.

So far this year, Chinese steel production is up 13% and infrastructure investment in China has risen by as much as 37%, according to figures cited by Maritime Strategies International. But Beijing has begun to restrict money supply to stop the construction sector overheating, leading to questions over how this will affect demand for dry cargo shipping. There was a significant uptick in shipments of pretty much every dry commodity in March, according to Nick Ristic, lead dry bulk analyst at Braemar ACM Shipbroking. “Some of this is down to stimulus-driven consumption or pent-up demand, but there are also a lot of stories of regional supply/demand mismatches,” he told TradeWinds. “Generally, we’re expecting the market to soften over the second half as these markets move back towards equilibrium, but again, we’re not expecting rates to fall off a cliff.”

Ristic said the question this year will be: how tough will China get on its polluting industries? “Several industry bodies have stated their aims to reduce steel capacity this year, which is one of the country’s biggest polluters, but production has shown no signs of slowing down yet,” he said. “At this stage, it’s hard to predict how strict officials will be — previous calendar-year stated limits in other sectors (like the coal import quotas in 2018/19) have rarely been reached — but the government does seem to have intensified pressure on GHG [greenhouse gas] emissions.” The situation is definitely becoming more politicised, “which could make heavy-handed cuts more likely”.

Macroeconomic indicators signal slower economic growth in China in the final six months, but Burak Cetinok, head of research at Arrow Shipbroking Group, said demand for commodities will be supported by infrastructure projects and the country’s booming manufacturing sector. “It’s still in question how this will affect bulker markets, as future steel production policy will be key,” he said. “Continuing emissions restrictions could result in import demand for scrap and semi-finished steel products supporting smaller vessel classes, which may dent the Capesize market.” However, iron ore stocks in China have plenty of room to grow, “so any downtick in consumption of iron ore may allow a restocking, particularly of higher quality, Brazil-origin material”, Cetinok said.

Ristic also expects demand for capes to soften as the influence of China’s economic stimuli wanes this year. “As steel consumption pulls back, and as the tighter pollution controls start to bite, iron ore imports are likely to slow down, though we’re not expecting a very sharp drop-off,” he said. “Thankfully for the smaller ships, the surge in grain shipments and restocking process will likely sustain itself through the second half.” Changes in trading patterns for grain are something to watch, according to Ristic. “Grains will likely continue to be supportive, as the US’ corn sales receive a boost from China, and other producers have run into weather difficulties,” he said. “The polarisation between the US and China has already impacted ballasting patterns for bulkers, increasing voyage durations and tightening the market. On the other hand, the South American crops are likely to come in lower this year, again due to weather-­related issues, so there is limited upside for total grain volumes from here.”

Analysts do not expect port congestion to maintain its underlying role in supporting bulker markets, but queues at ports are still common. Data from bulker tracking platform Oceanbolt shows that 2,850 bulkers are caught up in congestion worldwide, equivalent to around 25% of the global bulker fleet. As of Tuesday, the average waiting time was 9.5 days. Supras and ultras make up the biggest proportion of congested bulkers, with 774 stuck in queues worldwide.