Pacific Basin, an owner and operator in the smaller-sized bulk carriers, said demand to transport dry bulk goods has remained strong, leading it to enjoy the best quarterly time charter equivalent rates in 10 years. Its handysize fleet earned $10,950 per day, while its supramax vessels generated $14,630 per day in the first quarter of this year, the Hong Kong-based company said in a trading update. That is a “significant improvement” over its 2020 levels.

So far in the second quarter, it has achieved an average of $16,100 per day for its handysizes and $18,000 per day for its supramaxes. Given breakeven levels of $8,720 and $10,120, respectively, including G&A overheads, its current core fleet of 91 handysizes and 41 supramaxes that are owned and long-term chartered-in are now “generating attractive returns”, it said.

Despite a slight recent softening in spot rates, the company expects a stronger market in the second half of the year as dry bulk freight continues to benefit from “a broad-based increase in demand for commodities”. Preliminary data shows that dry bulk volumes loaded in the first quarter grew 9% versus the same period last year, driven mainly by strong Chinese demand for imports and global grain trades, Pacific Basin highlighted. Global grain loadings in the first three months of this year rose 15% year on year, as record high US soyabean and corn exports in late 2020 continued into 2021. “As the US soyabean export season now winds down, it is encouraging to see larger corn volumes than in previous years, the South American grain export season starting to ramp up, and significant demand again coming from China,” it said.

Loadings of selected minor bulks in the first quarter also increased 11% year on year, with strong growth in construction materials such as logs, steel and other breakbulk cargoes, which found cover in bulkers as container rates surged, it added. Iron ore loadings gained 9% on year, due in part to a surge in Indian demand for coal in response to a particularly cold winter.

“Due to Covid-related national travel restrictions, industries in China did not fully shut down as they traditionally do for the lunar new year holidays, which also contributed to the unseasonably strong Chinese dry bulk demand in the first quarter,” the company said. The sharp increase in spot rates in January to March was indicative of a tightening supply-demand balance, it said.

Although uncertainties related to the pandemic, geopolitical and the supply-side remained, a “vaccine and stimulus-powered support of economic activity” combined with lower dry bulk fleet growth made it optimistic about the freight market this year and beyond.

The company has taken delivery of two of the five modern ultramax ships it committed to buy last November and in February. The remaining three are expected to join its owned fleet during this quarter, along with a modern handysize it agreed to purchase earlier this year. Following delivery, it will own 117 bulkers. Including chartered ships, it had an average of 259 vessels on the water in the first quarter of 2021.

Chinese customs released both its monthly and YTD (cumulative) coal and iron ore import figures for March. The monthly figures indicate coal and iron ore imports of 27.3 MMT (up 32% MOM and down 2% YOY) and 102.1 MMT (up 13% MOM and 19% YOY), respectively.

The YTD timeseries suggest that Chinese coal imports thus far in 2021 have amounted to 95.76 MMT (unchanged YOY) and matching the elevated import volumes seen in Q1 2020. This seems to include revised volumes for the Jan-Feb period, which came in surprisingly weak last month, and more aligned with the observed strength in the dry bulk shipping market during Q1. 

For iron ore, cumulative figures from Chinese customs authorities suggest YTD iron ore imports of 262.4 MMT, which is down 0.1% from 2020.

We believe firm Chinese steel prices and low coal inventory levels ahead of the summer peak should be beneficial for dry bulk owners near-term.

Iron ore would be beneficial from a tonne-mile view, as higher-grade iron ore would be sourced from further away (e.g. Brazil), whilst coal should be beneficial on a purely volume related view, as Chinese authorities have the winter shortage fresh in mind.

Indian iron ore exports ramp up

• Indian seaborne iron ore exports increased by 47% in March to 6.6 MMT, the highest monthly total on record.
• The majority of cargoes headed to China, with 5.1 MMT of Indian iron ore discharging in Chinese ports, also the highest monthly total on record.
• This comes as China continues to diversify the sources of its raw material and agricultural purchases.
• Supras transported 4 MMT of the iron ore loaded in March, with Capes carrying 1.4 MMT.
• Our Braemar assessed BS13 route, WCI to Far East on Supras, has tripled YoY to $29,000/day.
• Steelmakers in India have pressured authorities to implement an export ban, as surging input costs and scarce domestic supply hit their margins.

Strong March Capesize activity lays groundwork for strong rates

• A heavy increase in Capesize loadings across several countries in March has helped to buoy rates over the past few weeks.
• India, China and Russia all saw their highest monthly export total on record in March, with 1.9, 1.4 and 3.2 MMT of dry bulk loaded on Capes according to AIS tracking data.
• Meanwhile, Cape cargoes loaded in Canada and Indonesia increased 55% and 127% MoM in March respectively, totaling 5.6 and 6.3 MMT, marking Indonesia’s second strongest month on record.
• Cape loadings in South Africa and the USA increased by 18% and 30% MoM respectively in March further contributing to strong Cape demand at present.
• As mentioned above, high iron ore prices have likely allowed China to diversify its iron ore purchases away from Brazilian and Australian producers. At these price levels, smaller miners have emerged as exporters, helping to boost bulker demand.
• Cape loadings of iron ore specifically grew by 18% MoM whilst coal loadings improved 26% MoM in March.
• On the import side, India also saw a monthly record amount of Capes discharging in March, totaling 11 MMT, rising 82% MoM.
• This was largely driven by coal demand, as the country’s industry continues to rebound from the pandemic related disruption last year.
• The Baltic Capesize Index is currently up 55% MoM rising to $25,976/day at time of writing.
• There may be more room to run for the index with the April FFA contract breaking through March highs and rising as high as $27,875/day today.

Brazilian soybean harvest continued to accelerate in the week ended April 10 on dry weather in most states and surpassed 5-year average pace, agricultural consultancy AgRural said April 12, putting pressure on US soybean export demand.

Soybean farmers had harvested 85% of the projected acreage as of April 8, compared with five-year average of 78%, AgRural said. Dryness remains widespread across the safrinha corn belt in Brazil, particularly in southeastern Mato Grosso, Mato Grosso do Sul, and Parana, weather agency Maxar said April 8.

Steady harvest progress in Brazil is likely to pressure US soybean shipments in coming days as the South American nation’s soybean exports have picked up pace in March.

According to the foreign trade department’s report released April 5, Brazil exported 13.5 million mt of beans in March, compared with last year’s volume of 10.8 million mt for the same period.

There were concerns that incessant rains of January and February may lead to excessive moisture in the soybean crop, which may potentially damage the oilseed, particularly in Mato Grosso and Parana, AgRural said. However, with dry weather in the past few days, those concerns are not significant anymore, AgRural said.

Soybean harvesting is virtually done in the Midwest and Rondonia and was close to completion in Paraná, São Paulo and Minas Gerais, the consultancy said.

However, soybean harvesting pace in Rio Grande do Sul has remained below the national average amid rains. But there was forecast for dry weather in coming days which should accelerate the harvesting activities, AgRural said.

Rains since mid-December have largely benefited the soybeans crop in Brazil.

As a result, Brazil’s soybean production forecast for the 2020-21 marketing year (February 2021 to January 2022) was seen steady at the current estimate of 133 million mt, AgRural said.

There have been 101 newbuilding deliveries in Q1 consisting of 5 VLOC, 21 Capesize, 13 Post Panamax, 21 Panamax, 24 Supra-Ultra and 17 Handysize.

Demolition to date numbers 43 ships: 10 VLOC , 5 Capesize, 7 Panamax, 2 Supramax and 19 Handysize.

Ultra’s (60-66,000 DWT geared) dominate the Supra sector though here too we envisage less deliveries than the 138 that came out of yards in 2020. With the current strong freight markets and a relatively young average age it is unlikely many of the 3,400 vessels in this sector will be scrapped this year.

Deletions continue to outnumber deliveries in the Handysize sector.

So, though there are 86 vessels left on the orderbook for 2021 their impact on the overall fleet may well be limited.

We expect a busy Q2 for deliveries but then expect to see the orderbook start to tail off in the second half of the year so we forecast total tonnage Inflow in 2021 to be around 35 MDWT.

Demolition has started the year strongly by virtue of a number of VLOC’s being taken out of service but with present strong freight markets we envisage the pace of scrapping to slow such that it may only total 11 MDWT by the end of the year.

A significantly reduced orderbook will mean overall net fleet growth at 2.8% to be well below the 3.9% in 2019 and 3.6% in 2020.

China was the largest single export market for 16 African states in 2019, and the largest single source of imports for 33 states in the same year, according to an Economist Intelligence Unit report on Africa-China relations. Although the pandemic caused a dip in trade during 2020, China has started 2021 briskly by strengthening and developing links across the African continent. It is a trend that has been building for a decade. Between 2009 and 2014, the European Union dominated bilateral trade with African states, but China narrowed the gap considerably between 2015 and 2020.

China’s relations with Africa have diversified from natural resources to consumer goods and mobile phones through a strategy of engaging with state governments at a high level; funding and delivering transport, water, power, and telecoms projects; and focusing attention on key ports and economies. “Chinese companies have tended to be more risk averse when it comes to Africa,” said Pratibha Thaker, editorial director, Middle East and Africa. “However, China is now more confident about hands-on engagement.”

The Covid-19 pandemic proved difficult for Sino-Africa relations, although Beijing’s gestures of goodwill helped. These included preferential access to vaccines, medical supplies, and PPE. Some external debt has been restructured, Ms Thaker observed, providing a financial lifeline for highly leveraged and vulnerable states. The success of Beijing’s Belt and Road Initiative in Africa is shown by DR Congo and Botswana signing up earlier in 2021 as the 45th and 46th African states.

Chinese companies operate a string of major ports in the continent, much of which has come with Chinese project finance and expertise. The east coast ports of Djibouti, Mombasa and Dar es Salaam have been targets for Chinese investment, serving as stepping-stones for inland states, such as Ethiopia. “China started investing in Ethiopia at a time when the country was chaotic,” said Sanya Suri, EIU country analyst for Africa. “China has looked at Ethiopia as a crucial point in its BRI, [especially for] penetration into Sudan. Ethiopia was handpicked as the first go-to country,” she said.

Ethiopia is undergoing political transition, a development that is creating tension in neighbouring Sudan and Djibouti. While this is concerning, China has refrained from engaging in domestic political issues, Ms Suri commented. “We believe China will stay out of domestic concerns across Africa.” There is also tension between Egypt, Sudan, and Ethiopia over Nile waters. However, China has not offered to mediate talks, “which reflects China’s desire to remain uninvolved”, Ms Suri added. China is also supporting the development of industrial parks and free trade zones in several African countries, and is working to secure bilateral and collective free trade deals. The first African state to sign a free trade agreement with China was Mauritius, in January this year. A further 13 states have bilateral investment treaties, which could develop into FTAs in the near term.

One of the critical issues to emerge during the pandemic is African states’ increasing debt to China, and whether debt restructuring would be considered. It would be possible, suggested Ms Suri, on a case by case basis. “China will look at specific factors such as a country’s economic growth, strategic importance, resource significance, and the political climate,” she said. With Chinese investors becoming more risk averse, new loans could be more focused. Asset takeover is not thought likely, but it is clearly in the minds of Africa state financiers. Last month it was reported that the Kenyan government had dismissed claims that the port of Mombasa could be taken over by the Chinese government if Kenya defaulted on a rail investment loan. A government press statement on March 15 clarified: “For the avoidance of doubt, there is absolutely no risk of China or any other country taking over the Port of Mombasa. The [Star Newspaper] story is not only alarmist but also risks straining relations with development partners and foreign investors.”

What might cause problems for China is discontent among young Africans that new jobs being created for local workers are in the labouring sector. The higher skilled jobs are not being offered widely. However, this is not thought to be a significant concern because most African economies have hugely benefited from Chinese investment. Among the conclusions was that China is building from a position of strength with a solid footprint in Africa “and an eye on maintaining dominance for years to come.” Future investment will continue to develop infrastructure and connectivity. This is “a busy commercial two-way street”, the EIU speakers said, that will present opportunities for China, African states, and third parties.

China’s ban on Australian coal has shaken up coal export markets but exporters like South Africa, Indonesia and even Russia and Mongolia have stepped into the breach, according to research from shipowners’ association Bimco. The shipping industry has adjusted to the shake-up much more easily than other trade tensions, such as China’s standoff with America over soybeans, the analysis found. But although shipping has adapted well to the changing trades with China, Bimco said it does not expect to see any meaningful changes in tonne-mile demand for bulk carriers.

“Shipowners have been fast to react to the changes in the coal trade, as importers and exporters have scrambled to find new buyers and new sources,” Peter Sand, Bimco’s chief shipping analyst, noted in a report. “This situation has been easier to manage than the last time there was a major shake-up in dry bulk trades, after China imposed tariffs on imports of US soya beans, when seasonality and ship positioning complicated matters. In addition to South Africa and Indonesia, countries such as Russia and Mongolia are set to benefit from the Australian coal ban in China.”

Despite the changing picture, Bimco does not expect the shifting trading patterns to have much meaningful impact on dry-cargo shipping. “Seaborne coal has traditionally had the lowest average haul of the major dry-bulk trades, and the changes currently happening are unlikely to change that, as some trades are replaced by longer hauls and other by shorter ones,” said Sand. “It will be more important to see how demand for Chinese coal imports develops and how tensions between China and Australia unwinds in the future.” The average sailing distance so far this year for a coal cargo from Indonesia is about half that of one coming from Australia, while coal from South Africa sails 1.5 times longer, Bimco said. Russian coal bound for China would provide a tonne-mile boost compared to Australia if it comes from the Baltic or Black Sea, Bimco said, but the vast majority of Russia’s seaborne coal exports to China are shipped from eastern Russia, which lowers tonne-mile demand. And coal imported from Mongolia makes its way to China by land, not by sea.

South Africa began exporting coal to China in December last year and exports have averaged 760,000 tonnes a month since then, accounting for around one-sixth of the country’s total coal exports in that period, according to the research. But while there are no problems with demand for South African coal, the country has been producing less and less each year since 2017 and continues to do so in 2021. Total seaborne South African coal exports fell by 24.3% to 9.3m tonnes during the first two months of this year, compared to the start of 2020. This led to a corresponding drop in the number of bulkers carrying South African coal, which fell from 160 in the first two months of last year to 104 in the same period in 2021.

Fifty-one supramaxes have carried just under half of the exports this year, as well as 27 capesizes, 23 panamax bulk carriers and three handysizes, according to data from bulker tracking platform Oceanbolt cited by Bimco. South Africa’s coal exports fell year on year by 4.4% in 2020, totalling 73.9m tonnes and have fallen annually since peaking at 81.6m tonnes in 2017. Coal volumes bound for China have left South Africa’s usual trading partners with a shortfall, the analysis said. Exports to India and Pakistan together took almost 70% of South African seaborne coal exports in 2020. However, South African exports to the two countries fell by 44.5% in the first two months of this year to total just 5.6m tonnes, the Bimco research said. Australian coal has been making its way to India to compensate for volumes from South Africa and Indonesia that would otherwise have made their way to the country but have been bought up by China instead.

With steel production in some regions still lagging pre-pandemic levels, a rebound in manufacturing activity has led to shortages. These pockets of demand have turned to the seaborne market to fill the void, boosting bulk carrier demand.

Steel trade up

March was a strong month for most dry bulk trades, but flows of steel products were particularly impressive, helping to propel rates to ten-year highs. Last month we recorded 15.5m tonnes of steel goods loaded onto bulk carriers (excluding scrap steel), a 30% increase YoY and the highest monthly figure since AIS cargo tracking began. On a quarterly basis, this brings total volumes over the last three months to 38.5m tonnes, 25% higher YoY and also the highest quarterly volume on record.

The Supramax sector has been the prime beneficiary of this increase. Trade on these vessels grew by almost 60% YoY in March to 9.3m tonnes, while volumes on Handies remained flat YoY at 5.5m tonnes. Liftings of steel on Panamaxes, though limited, also grew by 19% YoY to 0.7m tonnes.

Pre-pandemic, these trades accounted for on average 7.2% of demand for the Supramaxes, but the recent jump in trade has boosted this figure to  10.7%, making it the third-most important commodity group to this sector last month (after grains and coal).

Manufacturing rebounds

Manufacturing activity around the world has recovered from the pandemic far quicker than initially expected. This is likely down to the fact that the Covid crisis has hit the services economy far more than secondary industry, which has actually received a boost from increased demand for goods such as electronics and automobiles in some places. Manufacturing PMIs in the USA and the Eurozone, for example, have jumped by 2.0 and 7.3 points respectively since December 2020. Both indices are firmly above 50, indicating expansionary conditions for the industry while the Eurozone in particular saw operating conditions in March improve to the greatest extent on record.

Arbitrage opportunity

These recoveries, combined with China’s stimulus impulse last year have helped to prop up global steel demand, but there is more to the surge in trade than just an increase in consumption. Global steel capacity was slashed in the early days of the pandemic as orders dried up, but now, even as demand has recovered,  mills in some countries remain idled and production is tracking below 2019 levels.

In the US for example, steel output over the first two months of this year was still down by almost 10% YoY, and was 8% lower versus the same period in 2019. With domestic supply constrained, local steel prices have soared, fuelled further by infrastructure-heavy stimulus plans in the country. The result has been an arbitrage opportunity for exporters, who in March shipped the greatest volume of steel to the US on bulk carriers since 2015.

US steel imports in Q1 21 grew by 38% YoY, with growth coming in the form of Supramax cargoes from countries which did not heavily cut capacity during the pandemic, such as South Korea and Ukraine. Export-focused Japan also saw a boost in trade to US buyers, generating further long-haul business for the Supra fleet. With an average laden leg of around 30 days, the sharp rise in steel volumes into the US has played a significant role in the recent rally in freight rates.

In Europe we see a similar pattern, though shipments have been dampened somewhat by import restrictions. European steel output so far this year has lagged 2020 levels by 4% and is also down by 12% compared to the same period in 2019. Meanwhile, the sharp recovery in industrial activity has sparked shortages for manufacturers and a price surge. Imports last month were up by 13% YoY at almost 2m tonnes. Here again Supras have seen a boost in demand, but Handies have also enjoyed increased trade. Supramax and Handy steel shipments into Europe grew by 34% and 18% YoY respectively in March.

Nearby sellers in Turkey, Russia and Ukraine were the top suppliers for this market, but we also recorded an increase in longer-haul trades from China, Vietnam and South Africa, mostly made up of Supramax voyages. Imports however remain throttled by Europe’s quotas and anti-dumping duties. These will likely keep prices high, but they limit further upside for shipping demand.

Elsewhere, we also see areas of strong demand pulling in steel cargoes. Industrial activity in Southeast Asia and the Indian subcontinent has been resilient through the pandemic, boosting steel imports from other Asian countries. A jump in demand in Vietnam, Thailand, Indonesia and Bangladesh, for example, has helped to push Chinese exports to their highest levels since 2016. Purchases from these countries have also helped to lift South Korean exports to record levels.

All of these factors have added to tightness in the Pacific market where Supramax rates are currently double what they were at the start of the year.

Looking forward, we expect steel trade to remain elevated as long as certain regions struggle to regain lost output. This process will likely take a few months, provided industrial demand remains strong. Continued stimulus and a global recovery from Covid-19 is likely to sustain manufacturing activity, but the recent surge in cases in some countries presents a significant risk to this trend.

The IMF released its latest World Economic Outlook this week, and the fund’s fresh economic growth expectations show these diverging recovery paths. US GDP is now forecast to grow by 6.4% in 2021, a 3.3 percentage point improvement versus October 2020’s outlook. This is supportive of a broader recovery in steel consumption, but at the same time, the Euro Area’s 2021 forecast has been downgraded by 0.8 percentage points to 4.4%, owing to renewed restrictions to curb the virus’ spread. We will be detailing further how this updated economic outlook affects our view on the dry market in the coming weeks.

Nick Ristic

According to industry sources, firm Chinese steel prices has seen domestic steel producers favour iron ore with higher Fe content to increase their output. A local trader stated that “although overall trading of iron ore has been flat recently, trading activity for higher grade iron ore fines is relatively lively”, suggesting that iron ore with Fe content above 60% is gaining market share. In our view, the news should be seen as a positive given that China’s domestic supply of iron ore is characterized by poorer quality than producers further away, such as Brazil.

Simultaneously, market reports suggest that China’s main economic planning agency (NDRC) held yet another meeting to discuss measures for ensuring the country’s coal supply ahead of the summer peak. Seasonally, China’s coal consumption tends to pick up pace during the summer months, as thermal coal is used to generate electricity for air-conditioning. With the winter’s coal shortage fresh in mind, Chinese authorities are eager to avoid another period of rising domestic coal prices and have been urged by local utility companies to provide a more predictable import quota system. On the flip side, NDRC are cited wishing local coal producers to raise output and for higher power generation from non-coal sources.

In continuation of the above, China seems firm in its aversion of Australian coal volumes and are as a consequence hiking up imports from US, South Africa and Colombia – with the former exporting nearly 0.3m tonnes of coking coal to China during February 2021, which is up from nearly zero in October when the ban on Australian imports where imposed. Though still reliant on growing imports from its traditional suppliers outside of Australia, China’s marginal imports are being sourced from further away – hence boosting tonne-miles and potentially yielding a small relative advantage to mid-sized bulkers as alternate trading patterns could favour these vessel classes.

March saw a stunning 866,060 teu of new tonnage ordered, almost the same as was contracted throughout the whole of 2020, as the cash-rich sector starts spending some of its recent gains. According to data from shipowning organisation BIMCO, 45 ultra-large containerships with capacities in excess of 15,000 teu were placed last month as well as 27 smaller sized ships. “The turnaround for the container shipping sector offers a glimpse of the level of confidence currently seen in the business on behalf of owners as well as investors,” BIMCO stated in an update yesterday.

In all of 2020, a total 995,000 teu of container shipping capacity was ordered. Capacity ordered in the first quarter of 2021 has already reached 1,398,000 teu, a six-year-high compared to previous full years. The orderbook to extant fleet ratio – in single digits for most of last year – has leapt to above 15% in recent days. “Ultra-large containerships are the preferred choice of weapon in the arms race of the container shipping industry seeking to improve long-term profitability,” commented Peter Sand, BIMCO’s chief shipping analyst

In terms of profits, liners are basking in record territory. The bottom line for the container shipping industry in the final quarter of 2020 was net income of $9.1bn, according to a recent report from Blue Alpha Capital, a $9.1bn improvement from the year ago breakeven quarter result. The fourth quarter profit was a $4bn sequential gain from the $5.1bn earned in the third quarter. Typically the fourth quarter is a falloff from third quarter performance that is traditionally the strongest owing to retailer shipments for the holiday season. “In almost all measures, the 4Q20 results were the best actual quarterly performance by the container shipping industry in its history,” Blue Alpha Capital stated.

The fourth quarter results brought the full year 2020 net income to $15.2bn for the liner industry, which is the best industry annual result since at least before the financial crisis. Looking at the container shipping operations of the nine leading carriers reporting public numbers Alphaliner noted this week the results follow an average operating margin of 24.5% in the last quarter of 2020 based on a non-weighted average, with six lines either close to or above margins of 30%, something unheard of in liner history.

Liners are widely expected to report stunning results for Q1. For example, Cosco Shipping, the world’s fourth largest liner, on Tuesday said it expected this year’s first quarter net profit to total RMB15.41bn ($2.3bn), hugely up from the $44m for the first three months of 2020. “Momentum and current conditions indicate strong positive bottom line comparisons for at least the next two quarters,” Blue Alpha Capital stated on overall liner prospects. Blue Alpha Capital is led by American liner veteran, John McCown

A new shipping report from investment bank Jefferies points out that container rates are currently near all-time highs with the Shanghai Containerised Freight Index (SCFI) at around $2,600 per teu, down 10% from the highs seen in mid-January, but still 190% higher year-on-year, and 253% higher than the trailing five-year average for the first week of April. “The SCFI averaged a record high last year of $1,234, and we expect 2021 to be much better as market conditions related to high demand for goods persists,” Jefferies predicted, suggesting that shippers are paying around +25% for their annual contracts being signed this month. Jefferies expects containership fleet growth of 2.9% in 2021 and 2.4% in 2022.