Macro-economic signals continue to affect sentiment in bulk carrier freight markets. Commodity prices are falling. Globally, lumber prices are down around 60% in September compared to June, copper down 35%, and iron ore down 60% from a March peak of nearly $160 to a low on September 22 of $89.5. Rio Tinto and its biggest customer Baowu Steel announced on September 14 that they would cooperate to expand Pilbara production, so investment in new production continues. Overall, though, June to September 2022 have been miserable months for capesize operators and anxious months for operators of smaller tonnage as earnings were dragged down by capesize sentiment. As the Chinese property market slowly imploded, Chinese concrete production was down 6% in July and cement down 3% in August alone as producers faced lower demand and higher input prices which they found hard to pass on to buyers. Votorantim Ciment of Brazil put it succinctly in its most recent quarterly review: “Several factors impacted the world economy, which had already been weakened by the pandemic: higher-than-expected inflation across the world (especially in Brazil, the United States and Europe), tighter financial conditions, a worse-than-expected slowdown in China, reflecting Covid-19 outbreaks and lockdowns, and further negative repercussions from the war in Ukraine, with an increase in the cost of fuel, freight and energy.”

Meanwhile, Chinese steel prices fell by 30% from May to September. High temperatures in parts of China and flooding in other parts disrupted economic activity, as did rationed energy supplies and Covid-related lockdowns in several provinces. Exports have fallen too, impacting the geared bulker market. Capesize freight rates as measured by the Baltic Exchange C5TC average peaked at $29,139 for May and fell to $9,339 for August, bottoming out at a lowly $5,407 on September 8. A rally has subsequently begun with rates reaching $18,293 by September 23. FFAs suggest rising sentiment too, with November FFA selling at $19,000 on September 23, up $1,000 on August 23. There was less volatility in the smaller sizes. The Baltic’s panamax P4TC average for August was $14,483 and touched bottom on September 2 at $8,771 before resurfacing to reach $14,271 on September 23. The northern hemisphere grain season has begun and the loss of perhaps half of Ukraine’s output means more complex trading, leading to higher utilization of the fleet and perhaps more upside in freight rates. There remains confidence in the geared bulker market, if the bid to wholly acquire Island View Shipping by recently listed Taylor Maritime is anything to go by. On a dollar per dwt basis, supramax bulkers remain the goldilocks size, offering better returns than capesizes over the last 10 years. The Baltic Exchange’s S10 time charter average for August was $18,795 – double the C5 capesize average. Supramax earnings hit a low of $16,199 on September 12 before recovering to $18,172 by September 23. That is just a few dollars difference for the twice-as-expensive capesize. Year to date earnings for a supramax average $24,668 compared to just $16,568 for a capesize. Handysize bulker earnings, represented by the Baltic’s HS7TC average, have followed a similar trajectory reaching a low of $15,463 on September 6 and recovering to $16,836 by September 23. It must be said, geared bulk earnings of mid-teens per day would be pleasing on any given day, and if this is the bottom of the market, operators will be delighted.

The question now is whether the unseasonal recent decline in bulk carrier freight markets has ended, or whether this is just a pause before the US, EU and China fall into recession, bringing this remarkable pandemic episode to an end. Macro-economists say that rising interest rates (the Federal Reserve added 0.75 basis points to its funds rate on September 21) will pressurize global capital markets and property markets going into 2023. The expectation of a US recession is being priced into the stock market which is tracking its 2008 decline worryingly closely. The EU and UK are hovering around zero growth. Japan’s quarterly GDP growth for Q2 was recently upgraded to 0.9% from 0.5%. But, when stated in US dollar terms, Japan’s GDP is below $4trn for the first time in 30 years due to the yen’s 30% fall against the dollar in the last 12 months. Goldman Sachs has cut its 2023 China GDP forecast from 5.3% to 4.3%. As China is so important to the bulk carrier market, this is an ominous prediction.

China’s dominance in leading world trade is set to slow in the years ahead with other regions picking up the slack, according to a major new report from German logistics giant DHL, a publication with sizeable ramifications for the global seaborne map. DHL’s Trade Growth Atlas report published this month predicts China’s share of global trade growth will be slashed in half between 2021 and 2026, to 13%, with neighbors in Southeast Asia being among the main beneficiaries. Between 2016 and 2021, China ranked top with the fastest growth in both exports and imports. However, between 2021 and 2026, Asean countries are predicted to overtake the People’s Republic, followed by South and Central Asia and Sub-Saharan Africa. The report stated: “New poles of trade growth are emerging in South-east and South Asia and trade growth is forecast to accelerate dramatically in Sub-Saharan Africa. After decades of shifts to the east, the centre of gravity of world trade is poised for a turn south.”

The DHL report has created much discussion among analysts and trade experts, given its potential changes for the future of the seaborne trading map. Few industries are so beholden to one country for its fortunes as shipping is with China. Whether it’s oil, iron ore, LNG, or containers, and plenty more besides, China dominates seaborne trades, and has done throughout the 21st century, following its accession to the World Trade Organization. According to World Bank figures, China represented just 9.4% of global manufacturing capacity in 2005 with the US and Japan being number one and two at 21.8% and 13.5% respectively. By 2020, China had propelled itself to the top spot with 28.5%. “The future geography of trade will be impacted by a range of impending shifts, including the geopolitical landscape, the energy transition, and trends and changes in maritime logistics,” commented Jan Hoffmann, head of the trade logistics branch at the United Nations Conference on Trade and Development (UNCTAD), warning: “If lower shipping costs lead to more trade, higher shipping costs should lead to less trade.”

“The developments we have seen, especially in 2022, are leading to a situation where companies over the next five years to some degree will be shifting production out of China, most likely to other locations across Asia,” said Lars Jensen, CEO of liner consultancy Vespucci Maritime. Peter Sand, chief analyst at container freight rate platform Xeneta, said that more investments are being made primarily in Asia outside of China as manufacturers and shippers seek to build more resilient supply chains. “In the 2000s it was 100% of globalization that involved China, during the 2010s it was two-thirds, and going forward, well the geopolitics are stacked against China,” Sand said, picking out a host of countries including Vietnam, Thailand, Portugal, and Turkey as winners from this move away from China. Moreover, Sand argued that container lines have prepared for this transition with the current orderbook heavily in favor of ships in the 12,000 to 17,000 teu range, capacity better suited to the likes of Southeast Asia.

On dry bulk, citing data from Oceanbolt, Mark Williams, who heads up UK consultancy Shipping Strategy, said China’s share of the bulk carrier trade has been holding up “fairly well” in recent years. Oceanbolt data shows China’s dry bulk share has hovered between 35 and 42% between 2015 and 2022. “Yes, there is some decoupling already happening or else China would not be complaining about it. It would be a good thing for shipping to be less dependent on China,” Williams said. Not everyone is willing to accept DHL’s thesis that China’s growth will remain so muted in the coming years. According to the Global Trade Analytics Suite (GTAS) created S&P Global Market Intelligence, for the 2016-2021 period, by export value, mainland China accounted for about 13% of the global trade on average, with a compound annual growth rate (CAGR) of 5.9%. For the period 2021–2026, its exports are forecast by GTAS to grow 4.3% CAGR in terms of value. Mainland China’s share in global trade is forecast to remain over 15% throughout the period, according to GTAS. For the same period, countries in Central, Southeastern, and southern Asia are forecast to account for up to 0.4%, 8.4% and 2.8% respectively. Middle and East Africa will likely make up about 0.5-0.6% in the global trade, GTAS maintains.

Eric Robertsen, global head of research and chief strategist at Standard Chartered, said at this week’s Marine Money event in Singapore that this year was too premature for a China rebound. “China will recover but it will come later and will be more protracted from what we are used to,” Robertsen said. The Standard Chartered analyst reckoned that almost all of China’s current economic problems such as real estate and diminishing consumer appetite could be seen in a positive light for the shipping market. “Over the last 10 years, China has been saying they want to be a more consumer-based economy. Well, guess what? They’ll be going back to more old-fashioned infrastructure spend as economic levers,” Robertsen suggested.

China’s faltering economy has sparked mixed views from an industry forum about how shipping could be affected. The short-term prospect is bleak, according to Eric Robertsen, chief strategist at Standard Chartered. “China’s outlook is extremely cautious at the moment, and that is probably being polite,” he told a Marine Money conference in Singapore. The remarks come as the World Bank forecast GDP in the world’s second-largest economy to just grow 2.8% for 2022, amid disruption from draconian lockdowns and an ailing domestic property market. That is significantly lower than the 5.5% growth target set by Beijing earlier this year and in sharp contrast to a 5.3% GDP expansion estimated by the US-based organization for the rest of the 23 countries in the Asia-Pacific region this year. Mr Robertsen said he expects a recovery in China’s economy to largely benefit shipping, as Beijing returns to infrastructure investment and fiscal stimulus for a way out. “Over the past 10 years, you will have been told that [China’s] economy is changing. It is becoming more consumer-driven, more services driven. The old export model is being de-emphasized,” he said. “Well, guess what? They are changing back again. And that will mean more trade. More shipping.”

James Marshall, chief executive of dry bulker firm Berge Bulk, said the lockdowns in China have put shipping in a difficult macro environment. However, at least in the markets where his company operates, “volumes are reasonably resilient”, while the sharp correction in freight rates since this summer were largely caused by an unwinding of congestion, with the easing of lockdown restrictions elsewhere in the world, he said. Singapore-based Berge Bulk owns and manages a fleet of 80 vessels, most of which are capesize or bigger dry bulkers. Looking back, China’s stimulus policy in the first half of this year appears to have worked. It was led by the accelerated issuance of government bonds dedicated to infrastructure spending. Steel production is rising again, Mr Marshall noted. The latest data from the China Iron and Steel Association shows that the daily crude steel output by major domestic producers stood at 2.1 MMT between September 11-20, up 2.2% from the same period of the past month, or 7.7% year on year. Steel prices in China have also increased gradually, with a slight drawdown in stockpiles. “I think we are seeing some of that sort of infrastructure spend coming through and helping demand,” said Mr Marshall. “We will still see reasonable volumes going into China in the future.”

Rahul Kapoor, global head of commodity analytics and research at S&P Global, expects Beijing’s zero-Covid policy, which has scrambled factories and consumers in China, to remain in place until March 2023 when the National People’s Congress will be conveyed to confirm President Xi Jinping’s third term. Meanwhile, there is no quick fix in sight to the housing market recession, despite government efforts to stabilize the market by easing rules on presales, subsidies, and mortgages. “The key component here is the housing market. It saw a 7% contraction in the second quarter. That is a key driver for shipping. We all know it has always been. That is something which we are essentially worried about,” said Mr Kapoor. China’s exports and imports, another growth engine for the domestic economy as well as global shipping, are also slowing, he pointed out. Export value in US dollar terms increased just over 7% year on year in August. This was way off from July’s level of 18% and lower than analysts’ expectation of nearly 13%. “Next year, we will not be surprised if exports start contracting,” said Mr Kapoor, adding the struggling economy in large consumer countries in the west is likely to strengthen that trend of decline.

He further predicted a long-term deceleration of the Chinese economy to a growth rate largely below 5% over the next decade, amid various headwinds, such as high corporate debt, real estate bubbles and an aging work population. A relatively healthy state on the vessel supply side, backed by owners’ refrained order appetite due to fuel uncertainty and tonnage eaten up by trade deviation for geopolitical reasons, will continue to provide support for freight markets. But the China story should serve as a reminder to the industry that the demand-side disruptions should not be underestimated, he said.

Brazil grain exports remain strong in September

Brazilian grain exports are on trend to total 13.6 MMT in August according to AXS tracking, up 20.9% YoY. This would take Brazil’s grain exports in the first 9 months of the year to 120.5 MMT, up 13.2% YoY.

China has remained the largest single market for Brazilian grains, on track to import 2.8 MMT in September. These volumes are down 27.6% YoY and 35.2% on August, however, as stocks of the 2021/22 soybean harvest dry up. Brazil saw a poor soybean harvest of 126m tonnes in the 2021/22 season according to the USDA, down 9.7% YoY.

Corn exports are on trend to almost double YoY to 4.5 MMT in September, mostly to markets in South America, Europe, and the Middle East. According to USDA estimates, Brazil harvested 116 MMT of corn in 2021/22, up 33.3% YoY.

The trade is primarily benefiting the Panamaxes, with shipments on trend to increase by 16.7% YoY to 9.6 MMT in September. Supramaxes, however, have also seen more demand from Brazilian grains in the past few months, with liftings on track to total 2.8 MMT in September, a four-fold YoY rise.

OECD cuts global growth forecasts in mid-year update

In its mid-year economic outlook published this week, the OECD cut its 2023 global growth forecast by 0.6% to 2¼ per cent. This is down from a prediction of 3% growth in 2022. The organization cited increasingly widespread and entrenched inflation following Russia’s invasion of Ukraine as the main economic risk, particularly in Europe.

Euro area headline inflation is forecast to increase from 2.6% in 2021 to 8.1% in 2022, falling back to 6.2% in 2023. The tighter monetary policies needed to bring this inflation under control, demand destruction from higher prices, and energy shortages are expected to cause Euro area real GDP growth to fall from 5.2% in 2021 to 0.3% by 2023.

While strong EU imports of coal amid the ongoing energy crisis has supported overall dry bulk volumes, imports of other commodities have more closely reflected a slowdown in EU industry.

According to AXS tracking, EU dry bulk imports excluding coal fell by 3.1% YoY in August to total 30.0 MMT. Iron ore imports fell by 6.8% to 7.7 MMT, bauxite by 28.5% to 900k tonnes, steel by 15.8% to 2.6 MMT, and minor ores (such as alumina, manganese, and copper) by 65.3% to 900k tonnes.

The OECD is also forecasting a slowdown in Chinese growth to 3.2% in 2022, caused by strict Covid lockdowns and a weak property sector. Growth is predicted to recover in 2023 to 4.7%, however, supported by expected widespread government stimulus measures.

Mediterranean Shipping Co (MSC), the world’s largest container line, has joined its peers at the top of the liner rankings by going into the aviation business.

The Geneva-headquartered firm has debuted MSC Air Cargo, something that will take to the skies from early next year in response to customer demand, MSC said. The Aponte family firm had earlier this year also lodged a bid with Lufthansa to take over ITA, the Italian airline formerly known as Alitalia. The bid was rejected late last month.

Other top lines such as CMA CGM and Maersk have created air cargo divisions during container shipping’s recent record earnings period.

MSC is leasing four Boeing 777-200F aircraft from Atlas Air to launch the new airline with Jannie Davel, formerly of Delta Cargo, Emirates SkyCargo and DHL, tapped to lead the business.

MSC CEO Soren Toft said: “This is our first step into this market, and we plan to continue exploring various avenues to develop air cargo in a way that complements our core business of container shipping.”

Commenting via LinkedIn on the news of another carrier taking to the skies, Inna Kuznetsova, CEO of ToolsGroup, wrote: “So we will see three major carriers, Maersk, CMA, MSC, competing to build the UPS for cargo, full end to end solution with a better control over times/levels of service and as a result, better visibility.”

Around 1,900 staff have gone back on strike at the UK’s largest port, Felixstowe, from today for another eight days as a bitter pay dispute with Hutchison Ports shows no sign of a breakthrough.

A previous eight-day strike action last month brought the port, which handles more than 40% of Britain’s boxes, to a standstill.

The industrial action this time around coincides with an ongoing strike at the port of Liverpool, with many segments of the UK economy protesting the rising cost of living in recent months.

Shipowner body Bimco is laboring to draw up a standard industry time-charter clause for trading under new carbon emission regulations due to take effect on 1 January but will not deliver before November. That means charters going into the new year will not get the benefit of the much-anticipated Carbon Intensity Indicator (CII) clause. When a shipowner sells the use of a vessel under a time charter, it is essentially giving the charterer the right to dictate where it goes and at what speed. But owners who need to avoid a bad score on carbon intensity will want to have some say about speed, route, and sometimes even destinations. The clause would aim to provide some clarity about the two parties’ prerogatives.

A Bimco official and a member of the drafting committee separately told TradeWinds that despite meeting weekly throughout most of the year, the committee still needs several rounds of meetings to reconcile the views of the shipowner and charterer representatives who have been collaborating on the proposed industry standard CII clause. Bimco had said in April that it was planning to publish a CII clause the following month. Now, the organization expects to publish the clause shortly after a 16 November meeting in Washington DC. Stinne Taiger Ivo, director of contracts and support at Bimco, said the goal is to get a “fair and balanced clause” that also works well in practice. “That’s taking a long time, to find that right balance, so we are quite sure that we will put it out there and it will be widely accepted by the industry,” she said in an interview for an upcoming TW+ edition focused on the IMO’s carbon regulations.

Many owners and operators uncertain about the practical commercial effects of the CII have been looking to Bimco for clarity about how the burdens of decarbonization will be shared with charterers after 1 January, when the new CII rules as well as the new Energy Efficiency Existing Ship Index (EEXI) regime come into effect. Some operators have told TradeWinds that the uncertainty has been great enough to stall their first-quarter 2023 chartering programs. The same Bimco committee has already put pen to paper on two other model time-charter clauses related to decarbonization, one last December covering EEXI rules and one this month on emissions trading system (ETS) allowances. But one of the drafters said the ETS allowance clause may have to be redone, thanks to the indecision of EU bodies about the underlying rules that clause is meant to address and the start date of the EU ETS itself.

The most important of the rules from the point of view of commercial ship operations and the most complex to put in practice is the CII because it will force shipowners to use operational means to achieve good ratings, varying cargo capacity, routing, choice of ports, and especially speed. Compliance with the EEXI rules by contrast is likely to be achieved mostly by the brutal but simple mechanical means of installing engine or shaft power limitation devices. In the absence of an industry-standard clause to regulate operational CII compliance, shipowners will have to go on improvising their own contract language to define the respective obligations and rights of charterers and owners, something that has already been happening, but where small shipowners are more at the mercy of large charterers. Bimco drafting committee member Helen Barden, who is a senior solicitor at North P&I Club’s freight, demurrage, and defence department, told TradeWinds she has already seen and critiqued several club members’ in-house clauses addressing CII, a regime she characterizes as “far from straightforward” by comparison with the EEXI. The difficulty with the CII rules in their effect on operations is that they force operational choices, such as speed upon shipowners, or technically on document of compliance holders, which in many cases are third-party managers who act as agents of shipowners. But shipowners are not traditionally the makers of such operational choices. Charterers are.

“The flexibility granted to the charterer under a time charter is broad, and owners must follow charterers’ lawful orders. So, there must be some element of dialogue between shipowner and charterer under the CII, and there needs to be a contractual framework for that dialogue,” said Barden. Barden expects a range of attitudes from charterers when owners propose CII language for charterparties, whether homemade or industry standard. The charterers represented on Bimco’s drafting committee are largely enlightened about the need for cooperation with owners in achieving decarbonization goals. “There are certainly some charterers who are very reluctant to give up their prerogatives under a time charter. But others understand that owners need cooperation from charterers in achieving these goals,” she said.

Consumer spending in China has now grown on a year-on-year basis for three straight months.  Prior to these last three months, spending had contracted on a year-on-year basis for three straight months.  China’s large coronavirus surge this year ended in May, and May not surprisingly, marked the final month this year to see consumer spending contract on a year-on-year basis.

China’s consumer spending has very much been linked to new coronavirus cases and restrictions.  Of note too, though, is that China (like virtually every other nation) continues to experience significant inflation.  Higher prices have also been a factor behind Chinese consumer spending recently showing growth.

Shipyards in Asia, especially Japan, are struggling to get their heads around the extreme appreciation of the US dollar. In the last 12 months, the Japanese yen has depreciated by nearly 30% against the dollar. To put this another way, a ship paid for in yen is 30% cheaper for a dollar buyer than it was a year ago. The yen is now at its lowest level since the Asian financial crisis with the central bank deciding last week to intervene and to begin selling dollars for the first time since the late 1990s. “The incentive to talk to Japanese yards is clear,” commented Mark Williams, the founder of UK consultancy Shipping Strategy.

Meanwhile the Korean won has fallen 20% against the greenback over the last 12 months, breaching 1,400 to the dollar for the first time since the global financial crisis of 2008. South Korea’s finance minister, Choo Kyung-ho, said last week that the central bank would seek to stabilize short term volatility in the currency. This presents a problem for Korean shipbuilders, who tend to quote in dollars. They do not enjoy the same forex benefit as their Japanese competitors, though they have suffered similar levels of input cost inflation in 2022. The Koreans must also compete with the Chinese, whose central bank allows the currency to trade within only a limited band against the dollar. Even so the renminbi has breached the 7:1 level against the dollar this month, a level reached last in February 2020 as the pandemic spread worldwide. Before then, the renminbi was last this cheap back at the time of the global financial crisis of 2008.

Looking at the currency concerns for the world’s top three shipbuilding nations, Williams from Shipping Strategy told Splash: “Japanese shipyards might enjoy their weak yen benefit, but more than half their orders are for domestic buyers now, so the benefit is limited. Korean shipyards have forex hedging in place. Chinese yards benefit from a relatively stable and underpriced currency, supporting exports.” Thomas Bracewell, who heads up newbuilding research at brokers Arrow Group, said the weaker Asian currencies would support builders’ bottom lines for vessels under construction. However, for new contracts yards need to price in the risk of their own currency appreciating against the dollar through to delivery. “This risk is quite significant and indeed somewhat expected to happen over the coming years as one would hope the global politico-economic situation normalizes,” Bracewell said.

Bracewell also pointed out that the Japanese have majority yen-based costs, so managing currency volatility is critical. Korean and Chinese builders have greater dollar cost bases. For example, Korean builders’ steel purchase contracts are almost all dollar contracts. “It’s probably very difficult to quote any price right now as there is so much uncertainty about costs in the near future,” commented Ralph Leszczynski, global head of research at Banchero Costa, citing global inflation, and rising energy and workforce outlays, which yards are having to contend with. The one bonus for yards, Leszczynski said, is in the form of declining steel plate prices, which are now down by 25% year-on-year.

The sharp fall in both Chinese cement imports and domestic production are further evidence of the concerns surrounding the construction sector in China. After a steady start to the year, domestic cement production fell by 18% y-o-y in Q2 and the 1.35 BMT in the eight months to August represents the lowest figure at this stage in a year since 2011. Present forecasts predict annual domestic cement production to barely top 2 BMT, in which case that would be around 335 MMT less than annual production in 2021.

With a change in government policy in 2017 China rapidly moved from being the world’s largest exporter of cement to the biggest importer, peaking at just over 30 MMT last year. This development caused a dramatic change in trading patterns for Supramax trade in Southeast Asia as traditional markets for cement sales from Indonesia, Thailand and Vietnam to Bangladesh and Taiwan rapidly evolved into a China trade leaving Bangladesh needing to source most of its cement clinker from the Middle East and Pakistan.

By 2021 China was importing nearly two thirds of its cement from Vietnam (18.3 MMT) but there has been a major reversal this year with imports from Vietnam down 5 MMT y-o-y (-48%); Thailand at 4.3 MMT to date is in fact up 1 MMT y-o-y whilst China’s imports from Indonesia which totaled 2.5 MMT last year are only 0.6 MMT to date. Elsewhere imports from other local suppliers are also significantly reduced with Japan halved at 0.4 MMT and South Korea down by two thirds at 0.3 MMT.

Traditionally, most China’s cement imports have been carried by supra/ultramax tonnage but with firmer freight markets in the supra/ultramax sectors coupled with a greater proportion of cement sourced from Thailand, Panamax tonnage is now carrying about 50% of this year’s trade. Even Capesize vessels are loading occasional cement cargo mostly from Indonesia.