Data released today shows China’s industrial production in August grew on a year-on-year basis by 4.2%.  This marks the highest growth seen since March.  Also of note is that crude steel output last month came in at 83.9 MMT, which is up year-on-year by 0.5%.

Panamax bulker spot rates took their first drop in more than two weeks on Thursday, ending a rally that has seen the sector defy a dry bulk slump. The dip came a day after a bloody Wednesday on the panamax FFA market turned the futures curve in a downward direction. The Baltic Exchange’s Panamax 5TC, a measure of spot earnings on five key benchmark routes in the sector, dipped 2.6% on Thursday to reach $18,800 per day, sliding from a two-week high of $19,300 per day. The dip ended a rally that had seen rates rise from a nadir of just under $11,000 per day at the end of August.

The futures market offered a prelude to Thursday’s decline, with October contracts on the 5TC plummeting 10.5% in a single session to $17,800 per day and shifting the market firmly into backwardation, when futures are below spot rates. The October contracts slipped another $182 on Thursday. “The panamax market rally came to a shuddering halt today, following yesterday’s fallout from the FFAs and a host of fixtures and failures, the recently found confidence in the market was swiftly eroded as bids became vastly reduced,” Baltic Exchange analysts said on Thursday. “Sources said owners were yet to reduce offers, but the bull market appeared to have stalled for now.”

Thursday saw a quiet Atlantic market but more resilience in the Pacific. “The Atlantic returned a bit of a nothing day all in all with little happening but with cargo volume thin, pitted against a growing tonnage list the market is in need of some fresh enquiry and support to maintain recent levels,” Baltic Exchange analysts said. Among the day’s charters, Navios Maritime Partners’ 76,600-dwt Navios Taurus (built 2005) fetched a fixture with an unnamed charterer for China-to-Indonesia round trip at $19,750 per day, according to Baltic Exchange data. Ningbo Yipeng Shipping’s 76,100-dwt Yi Peng 5 (built 2001) scored a charter for a similar voyage at $17,500 per day. Both are better than the last-done fixture on the route on Monday, when Huayang Maritime’s younger 75,500-dwt Huayang Endeavour (built 2013) fetched a charter at $14,000 per day.

Before Wednesday’s futures plunge and Thursday’s spot pullback, physical rates were rising and FFAs pointed toward a market peak in October as panamaxes continued to outperform larger capesizes and smaller supramaxes. Mark Nugent, senior freight, and commodities analyst at Braemar ACM Shipbroking, said that China’s demand, strong cargo liftings in less common trades and strong Australian grain shipments were supporting the sector’s resilience. In a weekly report, he struck a positive tone for the future, as rising coal prices fail to deter major buyers from snapping up the commodity and demand for grain should be resilient even in the face of a potential economic downturn. “On the whole, panamaxes remain well-positioned to avoid a prolonged downturn in rates given the commodities they are primarily exposed to,” Nugent wrote.

It’s been the year of the tanker stocks, with the average equity covered by investment bank Jefferies up 134% in share price year to date. Those shares languished through 2021 as their counterparts in dry bulk and container ships made investors happy with outsize returns. But with the tanker companies reaching, or in some estimates exceeding, net asset value (NAV), the question beckons: are the shares fully valued, or is there more room to run this year and beyond?

Streetwise spoke to an array of equity analysts this week and a clear consensus emerged: the tanker rally still has plenty of legs. From Frode Morkedal of Clarksons Securities, there is this reminder: NAVs are not static but closely tied to what’s happening in the physical market. So even though Clarksons has its tanker group trading at an average 106% of NAV, there is more to the story. “The NAVs are based on ship valuations that are still low, given the state of the freight market,” Morkedal told Streetwise. With the tanker companies under his coverage owning vessels averaging nine years old, he finds it useful to examine valuations for a 10-year-old VLCC. Brokers quote the valuation of such a tanker at $62m. But with newbuildings currently priced at $120m, Clarksons would expect the value of a decade old VLCC to be $82m using standard depreciation.

“When the market is balanced, secondhand values usually reach that newbuild parity, giving owners their 10% to 12% return on an asset, which we believe is when VLCCs make $50,000 a day,” Morkedal explained. If that comes to pass, with the 32% increase in value of the physical asset, NAVs of the public companies would move up an average 50% because their balance sheets are levered up with debt. “This is equivalent to stating that price-to-NAV should be 1.5 times. To put it another way, we believe there is still significant upside potential,” he said. A former Clarksons analyst, Omar Nokta, reached a similar conclusion but with different methodology from his current post as lead shipping researcher for Jefferies. “We believe there is still meaningful upside that remains,” he said. “At the beginning of the year, the group was viewed as going through a difficult period and needing to shore up liquidity, and the valuation reflected that. As the year has progressed, valuations have improved and now there seems to be broad recognition of a real market recovery.” Nokta said the Jefferies tanker group is trading just below NAV on average, but at only 75% of where he expects NAVs to move over the next 12 to 15 months. This projected move is based on current vessel valuations staying the same but adding in expected cash flows in a stronger market as vessels depreciate. “However, we do not believe the consensus view is that the tanker market is heading into an exceptional period of earnings for an extended period,” Nokta said.

A third perspective comes from veteran analyst Jonathan Chappell of Evercore ISI. He struggled with his timing for a post-pandemic tanker rebound, making what turned out to be premature calls in May and August last year before trying again in January 2022. Clearly, it was a case of the third time being the charm, as first the clean product sector and then the crude market rebounded, partly fueled by Russia’s February invasion of Ukraine. Now that he and the tanker market are on a roll, Chappell is conditionally calling the bull run to last for some time. “Barring a global recession and associated demand destruction, the supply-demand balance looks very favorable for multiple years,” he told Streetwise. “And if there is a belief in the sustainability of a strong market, with robust cash generation, strong capital returns and rising asset prices, then NAVs will push higher, but more importantly, the multiples applied to NAVs (or whatever other metric is used) will also expand.” Chappell has been around shipping research long enough to remember the tanker “super cycle” that featured in his early years. “I’m not saying it’s 2003 all over again, because there are many differences,” he said. “But there are also a lot of similarities, and this cycle could extend beyond 12 to 18 months for the first time since the 2003 to 2008 super cycle.”

Ahead of the rest

In recent weeks, the Panamax vessels have shown the most resilience to the general drawdown in dry bulk freight rates. We look at some reasons that have contributed to this and if these factors can be sustained.

China coal demand improving

The sharp drop in Chinese coal demand at the start of the year, which almost exclusively caused the lows in Panamax trade, is starting to recover. China imported 13.6 MMT of coal on bulk carriers in August. Despite declining 5% MoM and 14.6% lower YoY, this is still 31.4% higher than the monthly average so far this year. With the winter period just over a month away, we can expect continued coal demand in China who are aiming to ensure energy supplies, and this will primarily benefit the Panamaxes. Hindering a return to the heights of last year’s coal imports in China currently are the persistent lockdowns and weak industrial activity which have reduced the country’s energy requirements. Suggesting coal buying has continued solidly in September, queues of unladen Panamaxes have increased to 6 MDWT at Indonesian ports, a 63% rise since the start of the month. Overall, a growing reliance on thermal coal worldwide and a revival in Chinese demand bode well for the Panamax market looking to next year.

Shipments excl. coal, grain strong

Overall, Panamax liftings have steadily improved as the year has progressed, amounting to 114.1 MMT in August, an increase of 4.3% YoY. Apart from the well-known growth in coal shipments, liftings of less common trades on the Panamaxes have also performed well offering welcome support as grain shipments start to slow. Panamax liftings excluding coal and grain totaled 27.4 MMT in August, rising by 3.2% YoY and the highest level so far this year. Breaking this down, shipments of aggregates, which includes different construction materials such as sand and gravel, were the strongest in August among these less popular bulk commodities. Panamaxes loaded 5.1 MMT of these construction materials in August, rising by 22.3% YoY. These more-niche shipments also disperse the fleet away from the large trading routes, driving longer ballast legs, which supports rates for spot requirements. On top of the increase in coal demand, a continuation of shipments of these less common trades should help support Panamax rates as we approach a slowdown in the large grain exporting regions.

 Bumper Australian grain

Grain shipments, like coal, have seen changing trading routes following the start of the Ukraine war. From Australia particularly , the Panamaxes have benefitted from increased shipments to the Middle East. Australia is expected to harvest a record crop in 2022 due to favorable weather conditions, with the USDA estimating production at 36.3 MMT, 49.8% above the 5-year average and the highest on record. This is a timely harvest given the loss in volumes from the Black Sea but also as production elsewhere, such as in the US and Europe, has been hampered by poor weather. Australian grain shipments on Panamaxes totaled 1.7 MMT in August, increasing by 85.7% YoY. This followed a near-record month for this trade in July which amounted to 2.4 MMT. Significant amounts of Australian grain has been shipped to countries which typically import Black Sea crop, such as to Europe and the Middle East.  

Capacity in shipyards rising

According to AXS, the number of Panamaxes in repair yards hit a 5-year high on 31 August amounting to 78 vessels. While having come off the highs since, this figure still lies at 62 Panamaxes. When translating this into demand, this metric reached the highest monthly total on record in August, implying more visits and longer stays. As many shipyards in China reduced capacity or halted activity altogether in Q2 due to Covid-19 lockdowns, we could be seeing the resultant backlog in scheduled visits now being worked through. Further, the typhoons in China are expected to prolong this effect as operations in some coastal regions slowdown and vessels remain in yards for longer periods. Overall, the Panamaxes remain well positioned to avoid a prolonged downturn in rates given the commodities they are primarily exposed to. Coal will continue to be shipped to meet global energy requirements, with volumes showing high prices yet to deter the larger coal buyers so far. A similar principle can be expected on the grain side as demand for food is relatively resistant to economic slowdowns. 

China’s efforts to diversify its sources of iron ore beyond Australia and Brazil look to have gone into reverse resulting in mixed results for different bulker types. Imports of Indian iron ore fell to the lowest level in more than six and a half years in July at just 300,000 tons, according to Simpson Spence Young (SSY). “Indian customs data shows a collapse in exports following the increase of the export duty on iron ore to 50% in May,” the broker said. “India-China iron ore shipments reached 33.6 MMT in 2021, primarily carried on supramaxes, and the curtailment of this trade removes a significant source of demand for tonnage looking to return to East Asia after discharging on the Indian subcontinent,” it added.

SSY said another major loss of cargo was the halt of iron ore exports from the Port of Yuzhny in Ukraine, due to Russia’s invasion in February 2022. Producers are now forced to rail cargoes to Constanza or Baltic Sea ports, or use river barging and as a result, seaborne shipments to East Asian markets primarily China have fallen sharply. “China imported 5.4 MMT of Ukrainian iron ore in the first seven months of 2022, almost all shipped before the outbreak of war, down from 10.7 MMT in the same period last year,” SSY said. “This implies a loss of around 43.6 MMT based on a voyage from Yuzhny to Central China,” it added.

China’s imports of Canadian iron ore have also fallen this year, down by 2.5 MMT year-on-year over the January-July period to 6.5 MMT. SSY said this reflects a return to more typical trading patterns, where Canadian iron ore is primarily sold into European markets. “The shorter trans-Atlantic voyages represent a tonne mile negative for capsizes,” the broker said. Furthermore, with Baffinland yet to secure permission to increase shipments from its Mary River Mine most of the iron ore trade from Baffin Island this shipping season was covered by existing contracts, resulting in little seasonal support to the Atlantic panamax market, SSY said. “This ice class trade has greater significance this year given the expectation Russian coal shipments from the Baltic Sea and Murmansk this winter will be curtailed by sanctions,” the broker added.

More positive for seaborne trade was the resurgence in West Africa-China capesize iron ore shipments following the reopening of the Tonkolili mine in Sierra Leone. “China imported 4 MMT of iron ore from Sierra Leone in January-July, more than in the four previous years combined and monthly shipments reached 1 MMT for the first time since 2014 in July,” SSY said. “With Guinean bauxite exports to China also increasing, West African mineral exports have been a rare source of fronthaul capesize demand growth this year,” it added. Chinese demand, potentially supported by government-directed economic stimulus, will be key to the outlook for iron ore exporters.

“Amid a real estate crisis and manufacturing sector slowdown, the delivered price of 62% Fe iron ore in North China (TSI) fell to a 10-month low of $95 per tonne on 2 September,” said SSY. “Smaller producers outside Australia and Brazil have historically been positioned higher on the cost curve and a sustained period of price weakness would see some come under financial pressure. “This could tilt Chinese imports further towards lower cost producers in Australia and Brazil,” the broker added.

The capesize bulker market staged a rebound on Wednesday after a several-week plummet that was followed by almost two weeks of modest gains. The Baltic Exchange’s Capesize 5TC spot-rate average across five key routes jumped 45% on Wednesday to $12,977 per day, marking the highest figure in five weeks. This average had plummeted to $2,505 per day on 31 August from $24,603on 18 July, before finding its way up to $8,952 per day on Tuesday. The C14 route for a round voyage between China and Brazil to carry iron ore lent the most support to the skyrocketing 5TC by leaping 36% to $12,875 per day on Wednesday. The C10 route between Western Australia and China also had a good day on Wednesday, rallying 32.7% to $16,136 per day on Wednesday for round-trip voyages.

Rio Tinto hired Ocean Longevity’s 171,000-dwt Ocean Queen (built 2004) on Wednesday to carry iron ore from Dampier, Australia, to Qingdao, China, at $9.60 per tonne after loading it from 28 to 30 September. That represents a rise from $9 per tonne on Tuesday when the Australian miner fixed Berge Bulk’s 175,700-dwt Berge Orizaba (built 2014) to ship the same quantum of ore on the same route.

Amid the spot rate gains, forward freight agreements (FFAs) fell on Wednesday, though the futures curve still pointed higher to the end of the year. October contracts dropped $607 to reach $16,607 per day, while November FFAs declined $1,232 to $16,786 per day. December contracts slid $571 to $15,679 per day.

The capesize market certainly saw big rate moves on Wednesday, but average spot rates are still low historically and seasonally, said John Kartsonas, founder of asset manager Breakwave Advisors, which runs a dry-bulk exchange-traded fund. “If only you think that this week last year spot Capesize rates were on their way to $100,000, ooofff.” he told TradeWinds. He said a storm in the North China Sea that is tightening supply on routes from Australia to China is giving capesize rates a boost. “Then, on the macro front, China’s real estate sector got some positive news in the last few days with the resumption of real estate projects which could potentially lead to higher demand for iron ore,” Kartsonas said. “We are also getting into October loadings, which historically have proven to be relatively high, while West Africa bauxite will also come into play as the rainy season ends.”

These factors have managed to pull capesize rates out of the abyss, but the market still has room for improvement in the fourth quarter, he said. “We remain of the view that we will see capesize spot rates into the mid-$20,000s in the next few months,” Kartsonas said. The Capesize 5TC provided a “standout performance” on Wednesday amid a recovery in sentiment, but the rate just puts the market back to the low levels of four weeks ago, said Ulf Bergman, market research analyst at Shipfix.

He noted that the smaller ships also had “more modest gains” on Wednesday. The Panamax 5TC gained $643 per day on Wednesday to reach $19,309 per day, while the Supramax 10TC picked up $234 per day to land at $16,559 per day.

MR tankers enjoyed “significant” rate rises on Tuesday as European imports boosted the market. Average rates for vessels in the Atlantic basin jumped 45% in 24 hours, hitting $51,000 per day. This was largely driven by a large spike for products headed to Europe, Norwegian investment bank Fearnley Securities said. The rate is also up 133% week-on-week. Tankers operating east of Suez are being fixed at above $60,000, Fearnleys reported.

Clarksons Securities also noted the market continues to improve. MR eco-earnings had peaked at $67,000 a day in early August before declining to $35,000 per day, the investment bank said. But in recent weeks, “the Pacific basin has gradually strengthened, while the Atlantic basin has recently made a big comeback”, its analysts added.

UK shipbroker Howe Robinson said MR rates on the 37,000-dwt TC2 route from Rotterdam to New York jumped because of a charterer needing an additional vessel off prompt dates for a West African voyage. Limited tonnage was available for the work, dragging the transatlantic rate up Worldscale 37 points to WS 257.5 for a vessel on subjects from Pembroke in the UK. The London-based shop described owners’ sentiment as “bullish”. “A market cargo from Sines has thus far struggled to attract many offers — three at last count, with levels in the high WS 200s for transatlantic,” the broker added.

Cross-Mediterranean trips are seeing “decent” enquiry levels that continue to trim tonnage supply and tighten up availability, Howe Robinson said. “Paper trading [is] way higher for the remainder of September, around WS 255 levels and even higher for October, so as long as the cargoes keep coming, we could be in for some very sharp rate rises,” the broker added.

Tanker rates improved across all segments on Tuesday, with average VLCC rates now up around 60% from last week to $48,000 per day from the Middle East to Asia. Scrubber-fitted eco ships are now earning $71,000 per day, versus older vessels without scrubbers on $43,000. Average LR2 rates rose 10% week-on-week to $68,000 per day.

The most recently released data as of September 11th shows that the daily coal burn rate at China’s six major coastal power plants has come in at 834,000 tons.  This is 3% lower than was seen one week prior and marks the lowest burn rate seen since early July.  The last four weeks have seen a significant change in coal burn.  Before these last four weeks, coal burn had set records during four of the prior five weeks. 

Overall, peak summer burn season is coming to an end.  The most recent 834,000-ton daily burn, though, is up year-on-year by 8%.  We remain more bullish for the Chinese economy compared to much of the rest of the world. 

Argentinian soybean sales surge following new government measures

Argentina’s government took steps to boost soy exports last week to replenish depleted foreign currency reserves and meet debt obligations. Soy farmers are being offered a preferential exchange rate of 200 pesos per dollar until 30 September, considerably higher than the official rate of around 140 pesos. Financing costs are also being raised for farmers stockpiling soybeans. Producers holding more than 5% of their output will face a minimum financing rate equivalent to 120% of the official rate.

Dry weather and high input costs led to a relatively poor soybean crop of 44 MMT in the 2021/22 marketing year according to the USDA, 9.5% below the 5-year average.  With inflation rates surpassing 70%, farmers have also been delaying sales of the crop. As a result, Argentinian soybean and soymeal exports on dry bulk vessels fell 23.8% YoY in August, totaling 1.6 MMT. The majority of this was processed soy meal, with Argentinian producers typically opting to crush soybeans domestically. Stocks have rapidly been offloaded since the measures entered into force on 5 September. The Rosario Stock Exchange reported soybean sales of 4.6 MMT from 5-9 September, up from 667k tonnes the previous week. With Argentinian soybeans offered at a discount to Brazilian and US crops, Chinese buyers are likely taking advantage of the increased supply. Panamaxes could particularly benefit if producers opt to export unprocessed soybeans to quickly take advantage of the preferential rates, with around 80% of global soybean trade historically shipped on this vessel size.

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Australia declares La Nina weather event

Australia’s Bureau of Meteorology has officially declared a La Nina weather event for the rest of the year, with models indicating a return to neutral conditions by 2023. The weather phenomenon is expected to increase the frequency of storms and rains in the key coal producing region of eastern Australia over the coming months. It also increases the likelihood of tropical cyclones in the north of the country. Australian coal output has already been disrupted by heavy rains over the last year causing flooded mines and damaging rail tracks. Australian coal exports totaled 29.4 MMT in August, down 8.9% YoY. Of this, 11.9 MMT were shipped to Japan, 4.9 to India, and 3.2 to South Korea. While rail shipments and mining operations have now returned to normal capacity, exports in August increased 28% MoM. However, the saturated ground and filled water storage facilities mean mines remain vulnerable to further rainfall.

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US railroads reduce freight services ahead of possible strike action

US railroad operators have begun reducing some freight services ahead of a potential strike later this week. Rail operators have also suspended the transport of hazardous materials, such as fertilizers, to prevent them getting stuck on the network if strikes go ahead. Two of the largest rail unions, collectively representing over 57,000 conductors and engineers, are holding out in contract negotiations. Failure to reach agreements by the expiry of their current contracts on Friday will open the door to strike action. Industrial action would grind US supply chains to a halt, with around a third of US freight transported on its rail network.

For dry bulk shipping, the most significant disruptions would be to coal and grain exports.  The US is entering its fall harvest season for crops including soybeans and corn, while coal mines have been trying to ramp up production to meet increased European demand. US dry bulk exports totaled 24.6 MMT in August, up 22.2% YoY. Of this, 6.6 MMT of coal was exported, a rise of 14.2% YoY, while grain exports were up 35.2% YoY, at 8.6 MMT.

Sharp falls in charter and freight rates seem to spell the end of the party for container shipping. War, inflation, and economic uncertainty are likely to drag markets further down in the interim period. But the fall from the extreme highs may be welcome, panelists told the TradeWinds Shipowners Forum in Hamburg. “Is it that bad?” asked Constantin Baack, chief executive of Oslo-listed MPC Container Ships. “We came from a historically high market, so a bit of a cool-off doesn’t really harm.” Fewer fixtures are being reported than at the height of the boom, and those that have emerged in recent weeks are much shorter. That reflected the lack of available tonnage in some sectors that could provide stability in the charter market. “Overall, we’re still in a very robust market environment,” said Baack. “Usually there are 1,500 vessels available to the charter market. Next year there are maybe 400 to 450, so there will be way few vessels available.”

Baack acknowledged that the subletting of ships may increase the supply of container ships. But subletting remains more difficult in container shipping than in other sectors of the industry, he added. Container ship charter rates continue to sink across the board. The New ConTex, which tracks rates for 1,100-teu through to 6,500-teu ships, is 11.6% down year on year. The index plunged to 2,733 for the week ending on 9 September. That is the first time that all sizes of container ships have registered a continuous negative trend over the year, German shipbrokers’ association VHBS reports. Tonnage providers that used to let business come to them are today chasing enquiries, said brokers. “We are no longer seeing the party that we are used to,” Alexandros Karydis, director of chartering at Hanse Bereederung told the TradeWinds forum. “The charterers have adopted a ‘wait-and-see’ strategy,” he said. That was a “logical” response to geopolitical and economic uncertainty, he added.

Some pillars of the container shipping market that have restricted supply remain in place. Port congestion is likely to remain an issue for a few more months, as the problem has shifted from the US west coast to ports in northern Europe. “Congestion will resolve over time, but we’re not there yet,” said Baack. “Thereafter, new decarbonization regulation kicks in.” Panelists differed on the impact of pending legislation such as the Energy Efficiency Existing Ship Index (EEXI) regulation, which is set to be introduced on 1 January 2023. Some suggest the impact will be greater once the Carbon Intensity Indicator (CII) kicks in and older ships must exit the market. But studies by German tonnage provider Atlantic Lloyd had suggested that engine power limitations would not make much difference to how vessels already perform, said managing director Ulrich Paulsdorff. Significant improvement in performance would not arise if the economic and ecological interests of shipowners were not “aligned”, he added. “What we have seen so far is when the economic incentive is higher than the ecological incentive, then C02/climate change [issues] will be secondary,” he said. Baack argued that the pending carbon legislation was expected to result in slower speed for smaller ships. The impact of decarbonization measures would be felt most on the intra-regional trades, such as in the Americas where vessels have a high-reefer capacity and operate at high speed, he said. Liner operators were likely to lead the innovation and had built up their financial resources, said financial experts. “The good news about the boom is we now have a very strong balance sheet across the industry,” said Axel Siepmann, director of Braemar Corporate Finance. “So, if we are now to tackle the required investment for change, there is a healthy balance sheet,” he added.

Other shipping segments have also taken steps to monitor the impact of EEXI and CII on their vessels. Odfjell, the Oslo-listed chemical tanker owner, had been looking at improving energy efficiency “ahead of a big tipping point”, chief sustainability officer Oistein Jensen told the forum. “Over time, we have invested in maybe 100 retrofit projects and for this year, we have planned for another 24 projects of energy-saving devices,” he said. Those devices comprised “everything from small digital technologies to large-scale propellers and hull modifications”, he added.