Having arrived in Q4 with a relatively healthy market on the Capesizes, we look at several factors that we expect to soften demand on the bigger ships in the Atlantic basin until the end of the year.

Seasonal peak in iron ore shipments

In the past several weeks, the Capesize C3 route has held relatively firm, printing at $23.4/t at the time of writing, 16.4% higher MoM. Rates more recently, however, have started to soften as prompt demand is now covered and more vessels are appearing which had previously been waiting for better opportunities. Brazil exported 31 MMT of iron ore on Capesizes in September, coming in flat YoY and 2.8% below the 5-year average. Over the last 5-years, Q4 has resulted in a 3.5% decline in iron ore volumes out of the country on average, implying a reduction of 3.3 MMT in cargo based on Q3 shipments. Of course, much of the slowdown can be attributed to the start of a period typically hampered by weather disruptions, affecting operations at the mines in-land. Going forward, we can expect the trend from previous years to continue this year and the slowdown in demand to become more apparent for later dates. Current weather forecasts suggest increased rainfall is set to hit the northern areas of Brazil, indicating we are unlikely to get an uncharacteristically dry fourth quarter, at least to start.

Growing ballasters list from the East

With the unwinding of Chinese typhoon congestion complete, the Capesize ballasters list heading past Singapore has started to grow again. While initially remaining low and queues largely filtering into West Australia, the resultant decline on C5 seems to have encouraged vessels which more recently discharged in the Far East to head West. According to our tracking, Capesize tonnage heading past Singapore totaled 8.4 MDWT last week, rising by 19.5% WoW. While it is known volumes out of Brazil are usually slower in Q4, it is the strength out of West Africa that has provided the support in the Atlantic recently. Overall, this is largely a reason ballasters have been confident in finding employment in the Atlantic with the Guinean monsoon season now over.

West Africa bauxite giving support

Despite what is stereotypically the monsoon season in Guinea, Q3 shipments of bauxite totaled 18.5 MMT on the Capesizes, rising by 36.6% YoY and double the five-year average. With any potential weather disruptions mostly out of the way, we can now expect the volumes in Q4 to improve. A lot of the expansion each year has come from better efficiency in supply chains in the country but also growing mining capacity. According to Reuters, African countries produced 70.9 MMT of bauxite in 2021 (predominantly being in Guinea), rising by 15.2% YoY and 67.3% higher than in 2017. The strength in bauxite demand in 2022 can be reflected in the stability of Chinese alumina, and thus aluminum, production which has proven very stable despite the macroeconomic and Covid headwinds the country has faced this year. Alumina output in China hit its highest monthly total on record in June at 7.3 MMT and has remained near these levels since. Downside risks to this growth, however, have emerged this week as the US and China escalate tensions over the Chinese semiconductor industry, which is very aluminum-intensive, although it remains to be seen what the outcome of the situation will be.

Using our average demand intensity calculations out of both Brazil and Guinea we can estimate the loss in Capesize demand from Brazil and ultimately the extra demand needed out of Guinea to make up for the downfall. By multiplying the 5-year average decline in Brazilian iron ore shipments QoQ in Q4 (-3.5% implying a loss of 3.3 MMT) by the demand intensity of Brazilian Capesize iron ore exports (avg 93.16 DWT days per tonne) we estimate a loss of 308.6 MDWT days.  To make up for the loss in Brazilian demand, Guinean bauxite exports (avg 106.91 DWT days per tonne) would have to increase by 2.9 MMT to 21.4 MMT in Q4, requiring growth of 15.6% QoQ and 10.8% YoY. While there are of course other factors at play, in this scenario we do not expect Guinean exports to reach new highs in Q4 and fully make up the estimated demand loss out of Brazil given the latest risks in the aluminum industry, which of course directly impacts bauxite demand. Increased Capesize shipments out of Colombia and South Africa would certainly help make up this deficit, although there are ongoing (but likely short-term) uncertainties over export volumes in both countries at present. In the North, we also expect to see a slowdown out of East Coast Canada iron ore, although just minor volumes, this is also a seasonal headwind facing the Capesize vessels in the Atlantic looking to the end of the year.

Strikes in South Africa

As has been well-reported, the ongoing strike in South Africa is hindering operations at the Port of Richard’s Bay. As it stands, vessels that were intending on loading in South Africa have shown little willingness to evade the country and continue to head West. While no force majeure has been officially declared, vessels are being delayed at berth due to the shortage in workers. As a result, queues have risen by over 1 MDWT at the port, the highest level since mid-March. So far, the situation has reportedly made progress, but a resolution has yet to be found. As operations remain muted at the port, it will become increasingly likely vessels bypass South Africa and head further West which could further put pressure on Atlantic freight rates in the coming week.

China’s coal-derived electricity generation was able to set a second consecutive record in August due in part from hydropower production coming under pressure.  Hydropower production fell year-on-year by 11% in August due to low water inflow.  September figures are pending, but we expect to see similar results.  Of note to us today is that Three Gorges Power Station generation data for the entire third quarter has now been reported.  Hydropower production at this critical station in the third quarter fell year-on-year by 52%.  Other smaller stations have also reported year-on-year production declines in the third quarter ranging between 10 to 20%. 

Overall, we remain quite bullish for China’s coal-derived electricity generation prospects, and we continue to note that China’s total electricity output and coal-derived electricity generation each setting new records in July and August has not received widespread attention.

September’s consumer inflation number came in higher today than expected at 8.2%.  The consensus was that it would come in at 8.1%.  In the past, missing expectations has resulted in significant weakness in the US stock market, and today is no different.  Of note, though, is that the rate of consumer inflation has once again declined.  Inflation peaked in June at 9.1%.  In July, it fell to 8.5%.  In August, it fell to 8.3%.  And today it fell to 8.2%.  Although missing expectations again, the Federal Reserve continues to make progress in its goal.  This is significant to us, and arguably just as important as inflation missing (or even exceeding) expectations by just 0.1%.  In time, we expect that overall market sentiment will take more solace in the fact that the rate of inflation continues to decline.  The United States (and most countries) continue to have serious issues, but missing broad expectations is at times obscuring the fact that the official rate of inflation continues to decline.

September’s consumer inflation number came in higher today than expected at 8.2%.  The consensus was that it would come in at 8.1%.  In the past, missing expectations has resulted in significant weakness in the US stock market, and today is no different.  Of note, though, is that the rate of consumer inflation has once again declined.  Inflation peaked in June at 9.1%.  In July, it fell to 8.5%.  In August, it fell to 8.3%.  And today it fell to 8.2%.  Although missing expectations again, the Federal Reserve continues to make progress in its goal.  This is significant to us, and arguably just as important as inflation missing (or even exceeding) expectations by just 0.1%.  In time, we expect that overall market sentiment will take more solace in the fact that the rate of inflation continues to decline.  The United States (and most countries) continue to have serious issues, but missing broad expectations is at times obscuring the fact that the official rate of inflation continues to decline.

The minuscule dry bulk orderbook is set to create a series of records in the coming years with few yards willing or able to offer early delivery slots.

New analysis by brokers Lorentzen & Co suggests that next year looks to be the first in three decades of almost net zero growth and the year thereafter the first in modern history of more tonnage going out of the market than coming in. The orderbook for bulk carriers is at only 7% of the existing fleet, a remarkably low fraction.

“Despite the market expected to be strong, demolition of ageing bulk carriers will probably increase, as new regulations will take their toll on the vintage fleet,” the new fleet forecast from Lorentzen stated. Lorentzen has also given its growth prospects for all the major and minor bulks. Lumped together, it sees growth in dry bulk volumes of 3.1% next year and 2.7% the year thereafter.

Dry bulk’s limited orderbook formed a key plank of discussion at yesterday’s Maritime CEO Forum held at the Monaco Yacht Club, with a full report from the dry bulk session due to be published next week.

Shipping is holding its breath as political leaders gather in Beijing. Charlie Du Cane pours some caution to those hoping Xi Jinping’s reappointment will instantly see an economic boost to shipping’s most important nation. Chinese ‘Kremlinologists’ have been working overtime recently, to their usual lack of good effect. We have had rumors that have varied from the ridiculous idea of a palace coup, to the more believable that Xi Jinping will get his unusual third term, but with his wings somewhat clipped.

In 2012 I was living in Beijing during the 18th Party Congress when Xi took over. The rumors then were all consuming and wild. Gun shots had been heard outside the Ministry of State Security, Xi was under house arrest, Xi was dead or badly injured. However, despite the fact there was some turmoil at the time with Bo Xilai’s failed maneuvers, the only tangible effect I saw was the garden of my neighborhood restaurant was shut for the three days of the meeting. Yet this weekend the world will rightly be watching as the head honchos of the CCP gather in Beijing. No one will be watching harder than the shipping industry. China has become the biggest star in our universe. No matter be it finance, shipbuilding, owning, or operating, China makes the weather in them all. However, especially in a dry bulk sector that thought it was booming until suddenly it really wasn’t, we only have one question on our mind. When will China start buying again? More than Ukraine, more than the broader economic head winds of inflation and spiraling interest rates, the greatest single fact in dry bulk shipping today is that China is not buying raw materials in the way it was as little as a year ago.

Why has this happened? Short term, the biggest reason of course is their draconian zero covid policy putting a massive break on the economy. However, there are a host of other issues lurking behind that which add to this. As early as 2015, the Chinese economy was beginning to slow after three decades of development at the sprint, its capital allocations were becoming ever more inefficient, its population ageing and shrinking. Equally China has become less maniacally focused on development at all costs, increasing commitments to sustainability, work life balance, and, recently, on equality. These have all slowed the economy down. Unfortunately for those waiting for a Beijing miracle, the Party Congress is not a policy meeting. It’s an enormous exercise in HR change management. This is where all the key leadership positions get sorted out and we will see who is in, who is out, and where power will truly lie for the next five years. Once settled in, the new- or not so new- leadership will begin to prepare for the ‘Two Meetings’ that will happen early next year. This is where policy decisions get made and approved.

Whilst policy announcements are normally few and far between at Party Congresses, we will get a sense of tone as the biographies of who is in charge begin to emerge. Whilst this is a more useful pastime than Kremlinology one should be careful not to lean on it too heavily. I am old enough to remember that people looked at Xi Jinping before 2012 and decided he must be a liberal reformer. So, caveat emptor anyone who buys into any sure-footed analysis of what is going on in China now or indeed ever. Fifteen years of living in China taught me only one thing. Nobody really knows anything about the place, even most Chinese. I will, hopefully, be entirely disproved as the Chinese economy goes rocketing ahead next week after a series of clear policy announcements, and we can get busy moving the resources of the world there again. I am not holding my breath, and nor should the shipping industry.

A strike launched last week by the two main labor unions for employees of South African state-owned ports and rail operator Transnet has led to a growing backlog of ships waiting for berths off the country’s main ports. As negotiations between Transnet, the United National Transport Union, South African Transport and Allied Workers Union, and South Africa’s employment and labor minister Thulas Nxesi remain in deadlock, the backlog continues to grow. Transnet operates dry bulk, container, and roro terminals at all South African ports, where it also has a monopoly on most ancillary port services.

Transnet also operates the freight rail services that feed into the ports. These have also been hit by labor action. The strike has directly affected all terminals operated by Transnet, which on Wednesday said had impacted a total of 28 vessels. The company, which has declared Force Majeure, did not specify what vessels were impacted, nor their type. Private dry bulk terminals have not been directly affected by the strike, although they have been indirectly impacted by the strike’s effect on rail services bringing iron ore and coal into their terminals. The ports of Richards Bay and Saldanha Bay, South Africa’s largest dry bulk export facilities, have seen a growing number of ships waiting in their anchorages, racking up hefty demurrage bills for charterers. Online vessel tracking database Marine Traffic showed on Thursday that there were 15 bulkers docked, and another 29 anchored off Richards Bay, the country’s main coal exporting port. Saldanha Bay, an iron ore port that mostly handles capesize vessels, has four bulkers alongside and another eight anchored offshore waiting to load. The ports of Durban and Cape Town each have a large and growing mix of bulkers, container ships and roros lingering in limbo outside port limits.

Transnet’s workers are demanding a wage increase of between 12% and 13.5%, across the board which they claim is in line with South Africa’s inflation rate. The company has so far offered increases of between 4% and 5%, which the unions have called “insulting”. Transnet, in its latest update on the strike action, said it was “committed to a speedy resolution to the impasse” and that it continued to “work closely with the shipping lines and industry broadly to manage the current situation” and “remains fully committed to moving customers’ cargo as efficiently as possible”. The soothing words of Transnet’s press releases have done little to reassure South African exporters. The country’s agricultural sector industry associations have told local media that they are extremely concerned that the strike will have a “calamitous impact” on the upcoming grape and stone fruit seasons if the strike is not quickly resolved.

Anglo-American’s Kumba Iron Ore, the fourth largest iron ore producer in the world, and the largest in Africa, estimated on Wednesday that the impact of the strike on production has been approximately 50,000 tonnes per day for the first seven days, and expects it will rise to approximately 90,000 tonnes per day as the strike continues. Export sales were estimated to have been impacted by approximately 120,000 tonnes per day.

The UN will attempt to get warring foes Ukraine and Russia to extend the Black Sea Grain Initiative for a year, while also looking at ways to streamline the way ships are inspected amid a growing congestion problem at the three ports designated in the transport pact. The grain agreement, brokered by the UN and Türkiye to facilitate the export of Ukrainian grain from the ports of Odesa, Chornomorsk and Pivdennyi was initially concluded for 120 days and expires towards the end of next month. Around 7 MMT of grain has been moved in the opening weeks since the parties signed on to the initiative.

The UN is anxious to cut back the lengthy inspection process of each ship heading out of the Black Sea with vessel traffic services detecting queues of around 120 vessels waiting to enter and exit Ukraine’s Black Sea ports this week. Ship inspections are now taking 10 to 15 days due to a shortage of inspectors. In August, the average time spent inspecting ships was four days. The need for greater volumes of grain to be exported from Ukraine, a powerhouse producer, is becoming ever more urgent. By the end of the 2022-23 crop year, the world’s buffer stocks of corn will be enough for just 80 days’ worth of consumption, down 28% from five years ago and the lowest level since 2010-11, according to the International Grains Council (IGC).

The IMF has put out an improved outlook for the economies of China and India for 2023, but some in dry bulk shipping are taking such optimism with a grain of sea salt. The IMF expects gross domestic product (GDP) growth for China, the world’s leading iron ore importer by far, to rise to 3.4% next year from 2.2% this year, according to a report. The UN financial body expects India’s GDP growth to reach 6.1% for 2023, up from an expected 3.3% for this year. The IMF expects the GDP for the ASEAN-5 nations of Indonesia, Malaysia, the Philippines, Singapore, and Thailand to expand by 4.9%, up from 3.8%. But only time will tell if IMF’s optimistic GDP growth outlook for next year comes to fruition, a dry bulk shipowner told TradeWinds. “I hope it’s the truth because dry bulk will go up if this happens,” the owner said.

“Nothing is implausible, but it means that China abandons its zero-Covid policy and figures out how to deal with its problems in the housing construction market, and the US and Europe don’t go into a recession.” The IMF expects only 1% GDP growth for the US and a 1.4% expansion for Eurozone countries in 2023. It is great to see higher GDP growth numbers, but it is impossible to tell where the global economy will be next year, said John Kartsonas, founder of Breakwave Advisors, an asset management firm that runs a dry bulk ETF platform. “A year ago, IMF had the US growing 5%, and now we end up with maybe 2%,” he told TradeWinds. “But if indeed economic growth accelerates, especially in China, this is positive for dry bulk shipping.”

Kartsonas noted that China plans to inject a significant amount of stimulus money into its economy, a move that could boost iron ore imports for infrastructure and construction projects. “Still, for China, you are looking at a slower growth versus the last decade, but still, the economy has expanded so much that the historical high single digit rates will be difficult to reappear,” he said. But even the futures market indicated skepticism for better bulker spot rates in 2023.

The Baltic Exchange’s Capesize 5TC basket of spot-rate averages across five key routes slipped 2.1% on Wednesday to reach $18,241 per day. FFAs for the route basket in 2023 came in at $13,406 per day on Wednesday. But Stamatis Tsantanis, chief executive of capesize owner Seanergy Maritime, still held a positive outlook on dry bulk shipping. “Despite the economic slowdown, we expect [infrastructure] projects and stimulus in China to be increased,” he told TradeWinds. “In addition, once coal inventories in Europe start to deplete, we should see restocking to cover the continent’s energy needs. We remain very positive for the cape trade.”

Taylor Maritime Investments (TMI) is proposing relaxing financial restrictions to give it the power to make more acquisitions on the day it launched a takeover offer for Grindrod Shipping. The London-listed shipowner said the idea is to allow greater flexibility over the size and financing of investments it can make while not detracting from the company’s overall “objective, policy and investment philosophy”. Ed Buttery-led dry bulk player TMI is paying $26 per share for Nasdaq-listed Grindrod in a deal valuing the target at $494m. TMI already owns 26% of the bulker company.

Now it is asking shareholders to approve a policy that will allow management to invest up to 40% of gross assets in other shipping companies in “exceptional” cases. The aim then would be to bring this down to 30% within 18 months through a combination of vessel sales and group restructuring. The gearing limit will also be increased to facilitate other large deals like the Grindrod takeover. This will also have a new limit of 40% of gross assets, with a commitment to return this to within the current limit of 25% over the same period. TMI already has acceptances for the changes from investors controlling 37.6% of the stock.

The company also announced that it has agreed to sell a 2012-built supramax for net proceeds of $20.1m, generating additional cash to support the Grindrod deal. The vessel was part of the seed fleet when TMI carried out its initial public offering last year. The only supramax left at the company is the 59,000-dwt Pacific Hero (built 2012), valued at $21m by VesselsValue. The bulker was acquired from Tokyo Century Corp in May 2021 for $18m. The fleet will then consist of 26 ships, all handysizes.

Chief executive Buttery said: “We are pleased to be able to realize a significant gain on the sale of a vessel in what continues to be a liquid market for the dry bulk segment. Meanwhile, the softening of charter rates through the previous quarter owing to decongestion as ports reopened, a weaker-than-expected grain season and typical summer weakness has now abated, with time charter rates climbing steadily from lows in early September and vessel values expected to follow,” he added. The diversified chartering strategy meant the company was able to maintain healthy earnings through the softer period, Buttery said. The company has covered 56% of remaining fleet days for the financial year ending 31 March 2023, and 20% for the following 12 months. TMI said this provides strong earnings visibility and certainty, with the opportunity to secure more charters at attractive rates. In July, the owner reported strong profits consisting of net earnings of $253m for the year to 31 March.