Beijing’s new stimulus package is expected to benefit the faltering capesize dry bulker markets, but the distressed Chinese property market and the zero-Covid policy continue to pose risks to any recovery. To spur economic growth, the State Council last week approved a Yuan300bn ($43.4bn) budget allowing state policy banks to invest in infrastructure projects. That was in addition to Yuan300bn announced in June. Combined with Yuan500bn of special bonds from previously unused quotas for local governments, the measures will lift the total funding largely focused on infrastructure spending to more than Yuan1trn. Total spending could end threefold higher when including related corporate investment, according to a Bloomberg report. 

“We remain positive that demand from infrastructure projects should improve in the coming months, supported by China’s policies,” said BIMCO’s chief shipping analyst Niels Rasmussen, adding that the stimulus could help boost China’s appetite for iron ore imports. The import volume declined 3.3% year on year for the first eight months of this year, the shipping association said in a research report, citing preliminary shipping data from Oceanbolt. Amid lackluster demand from China, the world’s largest buyer of iron ores, the freight market for capesize bulkers, the main ocean carrier of the commodity, remains in the doldrums. The average daily weighted time charter rate for capesize on the Baltic Exchange has dropped from a peak so far this year of $38,169 on May 23 to just $2,505 at the end of August, before it rebounded to $6,076 on September 2. Meanwhile, the Chinese economy this year has been plagued by a string of factors, including heavy-handed lockdowns triggered by a revival of domestic infections and the housing market turmoil.

The country’s gross domestic product grew 2.5% for the first half of 2022, with almost flat growth in the second quarter. The full-year growth forecast by various organizations is in the range of less than 3% to just above 4%, way off the official target of 5.5% set earlier in the year. The situation may change if Beijing adopts a “courageous” monetary policy, which could lead to a strong boost in activity with excessive results for the [large dry bulker] freight market,” Thomas Chasapis, an analyst at Greek-based Allied Shipbroking, said in a report this week. There are, however, doubts over how aggressive the policymakers can become. China is unlikely to repeat what is seen as a reckless monetary policy during the 2008 global crisis, with concerns over a shoot-up in the country’s already high debt ratio and its aspiration to shift the growth engine from property-heavy investment to consumption, according to another ship brokerage Braemar. “Supportive measures are likely to remain targeted, focusing on infrastructure and consumption, while only doing the bare minimum to keep the property market afloat. Demand should remain anemic until the systemic headache of the housing market is addressed and resolved,” said Braemar analyst Alexandra Alatari. “Until then, the Chinese economy cannot recover sustainably.”

BIMCO said a return to growth in Chinese iron ore imports will be heavily dependent on a stabilization of the housing market, which makes up 10%-12% of China’s gross domestic production and is the main user of steel in the country. “A recovery would be a boon for especially capesizes that have recently suffered an 85.5% drop in the Baltic Exchange Capesize Index due to increased supply following a reduction in congestion,” said Mr Rasmussen. That prospect, however, has been compromised by Beijing’s resolute refusal to live with Covid, an approach that has been adopted by most of the countries elsewhere. “China’s zero-Covid policy has greatly affected business and consumer confidence in 2022 and that is clearly visible in the sluggish housing market. Any new and prolonged large-scale lockdowns could, however, threaten a recovery in the housing market and thereby a rise in demand for iron ore,” said Mr Rasmussen, adding that a recent lockdown in Chengdu — one of China’s biggest cities, with a population of 21m — is a case in point. Recent infection waves have also hit several other major Chinese cities, highlighted by Dalian in the north and Shenzhen in the south, where strict restriction measures, including a partial lockdown, are put in place.

Average spot rate assessments for capesize bulk carriers have more than doubled in the space of two days, shortly after market watchers were wondering whether assessments for capesize bulk carriers might enter negative territory this week. But analysts say the turnaround has come on the back of short-term effects on vessel supply and that the market needs a more radical boost to demand for rates to take off again. The 5TC, the weighted average of spot rates across five key benchmark routes, jumped $2,189 to $6,076 per day, according to Baltic Exchange assessments. That is an increase of 56% compared to Thursday, when the index was assessed 55% higher than the previous day.

Burak Cetinok, head of research at Arrow Shipbroking, said the upturn in the market is due to factors that are limiting vessel supply in the short term. “The market has been testing higher recently, but the weather delays caused by Typhoon Hinnamnor have encouraged more resistance from owners over the past couple of days,” he told TradeWinds. “Congestion is also inching up and could rise further as new lockdowns in China, such as the port city of Dalian, may increase waiting times.”

For the market to recover fully, there will need to be a much clearer and more decisive turnaround in fundamentals, Cetinok added. “Looking ahead, the supply-demand balance in the capesize segment is seemingly bottoming out, but it is too early to say that the recovery can be sustained at this stage.  Demand is still weak, and supply is still high. We need to see further tightening in the market before forming a firm opinion about where the rates are heading.”

In the meantime, capesizes earning around $6,000 each day are still barely covering their outgoings and the sector still has some way to go before it can be said to be in the money once more. Daily operating expenditure for bulk carriers of all sizes is estimated at $5,085 per day, according to the Baltic Exchange’s last estimate in July. This figure, however, comprises only crewing, technical and insurance costs, and associated fees. Typhoon Hinnamnor, believed to be the strongest tropical storm of the year, is forecast to hit mainland China, southern Japan, and South Korea this weekend as it moves north through the East China Sea.

The big moves in rates on Friday were seen for round voyages originating in the same region. Transpacific round voyages from China/Japan were assessed $3,354 higher at $10,445 per day. Panelists priced round voyages to Brazil from China at $8,000 per day, up by $3,020 since Thursday. Over in the Atlantic, rates have firmed but less dramatically. Just two new iron-ore fixtures from Brazil for China were reported this week, while six capesizes were reported by major miners for ore voyages from Western Australia to China. Another cape was booked this week for a trip from Seven Islands in Canada to Rotterdam with iron ore. “Vessels in the Atlantic have had difficulties finding cargo, while those available have been fought over with prices diving as a result,” the Baltic Exchange said in its weekly market report on Friday. The transatlantic round voyage was assessed at $2,367 per day on Friday, up by $1,167. Rates on the route bottomed out at $944 per day on Wednesday.

“As several capesize vessels have gone into hot layup at strategic locations, scrubber-fitted vessels have continued to trade as normal due to the high and low-sulphur bunker spread commanding a strong premium,” the Baltic added. Scrubber capesizes continue to have the edge on their competition, while the price of very low-sulphur fuel oil (VLSFO) remains at a costly premium to heavy fuel oil. The average price of VLSFO across 20 bunkering ports worldwide was $770.50 per tonne on Friday, $244 more than the average price of IFO380 bunker fuel, according to data from Ship & Bunker. As the capesize market regained its pulse, the sector helped the Baltic Dry Index to pull itself up above the 1,000-point level once again on Thursday. The index, the overall indicator of the strength of bulker markets excluding handysizes, was calculated at 84 points higher at 1,086 points on Friday.

Brazil’s seaborne exports of soybeans have dropped significantly while costs to ship the commodity overseas have risen, according to the US government. The country exported 32.1 MMT of soybeans during the second quarter, down from 42.1 MMT during the same period last year, a US Department of Agriculture report showed.

China imported 20.5 MMT of those soybeans during the three-month period, down from 28.8 MMT a year ago. The next highest shares of Brazil’s soybean exports, in declining order, went to Spain, the Netherlands, Thailand and Turkey. The southern ports of Santos, Rio Grande, Paranagua and Sao Francisco account for 73% of Brazil’s soybean exports to China, the report said. But the cost to ship the commodity on the ocean from Brazil to other parts of the world went up during the second quarter compared to the same period of last year, the report indicated.

For example, the average freight rate to export soybeans from Santos, Brazil, to Shanghai rose to $65.75 per tonne during the quarter from $50.60 per tonne during the same period in 2021. Demand for bulkers that usually carry soybeans from Brazil to China also boosted freight rates during the second quarter from a year ago.

For example, the cost to ship grain from Santos to Qingdao stayed around $70 per tonne for most of the second quarter to reach a high of $71.077 per tonne on 20 June, according to Baltic Exchange data. A year earlier, the price fell as low as $44.40 per tonne on 12 April before slowly reaching a second-quarter high of $69.364 per tonne on 30 June.

With a full ban on Russian coal imports since mid-August, Europe is increasingly focused on sourcing its coal from other destinations notably Colombia, USA, and South Africa. South Africa’s total January-July exports expanded to 40.9 MMT (+3.9 MMT/+11 y-o-y), with exports to the Continent/Mediterranean region rising from 0.7 MMT in the first seven months of 2021 to 9.7 MMT y-o-y in 2022, comprising 24% of total shipments, up from just 2% in 2021.

This backhaul trade has been dominated by Panamax and Capesize shipments. For instance, a significant amount of 2.8 MMT of coal shipped to the Netherlands from South Africa has been carried in Capesize and this changing trade pattern together with Capesizes bringing coal in from elsewhere has led to markedly increased congestion in Rotterdam with around 15 Capesize vessels presently at anchor waiting for a berth in Europe’s largest port. In addition, 50 Panamax vessels carried over 4.3 MMT of coal to Europe in the first seven months of the year compared to only 1 Panamax shipment over the same period last year.

The shift in trade in Panamax tonnage to the Atlantic has led to more balanced availability in this sector between the Atlantic and Pacific basins and has clearly acted a brake on outbound rates in the past few months.

Lockdowns are sweeping across major metropolises in China, sparking renewed concern about manufacturing output from the world’s second largest economy.

Chengdu, the sixth-largest city in the People’s Republic with a population of 21.5m, entered full lockdown yesterday. The city, located in the western province of Sichuan, boasts factories from the likes of Toyota, Intel, and Foxconn among many others. The lockdown is the largest seen in China since Shanghai emerged from a two-month lockdown in June.

Several other key economic centres including the port cities of Shenzhen, Guangzhou, Dalian, and Tianjin have enacted various levels of restrictions this week. Most of Shenzhen’s nearly 18m population is now subject to covid controls, while up north millions of Dalian citizens have been forced back to their homes this week.

“Covid hotspots are shifting away from several remote regions and cities, with seemingly less economic significance to the country, to provinces that matter much more to China’s national economy,” Nomura Holdings wrote in a new report.

Leaders in Beijing are widely reported as having scrapped their goals of securing a 5.5% improvement in GDP this year with most 2022 estimates now lying closer to 3%.

Nearly a quarter of European companies in China are considering shifting their investments out of the country thanks in large part to the nation’s strict covid policies, results from a survey released in June by the EU Chamber of Commerce in China said. Similar sentiment was echoed in other reports from American and British chambers of commerce.

As predicted yesterday on this site by Dr Roar Adland from the Norwegian School of Economics, the cape market finally displayed signs of bottoming out. Having suffered one of the worst Augusts on record, capesizes showed some twitching of muscle yesterday, the key 5TC route firming by $1,382 a day to $3,887. “The tide seemed to change yesterday, with the physical market bottoming out and the paper boys buying on improved outlooks, despite dark clouds still weighing heavily on the market,” a market update from Norwegian broker Lorentzen & Co suggested this morning.

With weeks to go until the Chinese leadership meets in Beijing for the likely rubber stamping of president Xi Jinping’s third term in office, focus is turning to how China can fix its economy, which has stumbled badly this year thanks to covid lockdowns and the implosion of the real estate market. The Chinese housing market is currently plagued by high debt among developers, a drop in sales, falling housing prices, and an increase in mortgage payment defaults. Residential housing accounts for 10-12% of China’s GDP and is one of the main uses of steel in China.

An update from Joakim Hannisdahl-led Cleaves Shipping Fund in Oslo yesterday discussed the “continued stream of negative news” on the Chinese economy. The fund warned it is now cautious towards the dry bulk sector for the next six to 12 months due to problems in the Chinese construction sector and continuous covid-related lockdowns with Chengdu, the sixth-largest city in the People’s Republic, entering another big lockdown. “Chinese stimuli will likely have a positive effect on dry bulk shipping demand from late 2022/early 2023, depending on how extensive the crisis in the construction sector becomes,” the fund predicted.

Preliminary shipping data from Oceanbolt showed a 1.7% year-on-year drop in Chinese iron ore import volumes in August. The volumes are, however, the highest since January and follow a 3.1% year-on-year increase in July. Year-to-date, Chinese iron ore imports are down 3.3% year-on-year, making up around 20% of global dry bulk volumes, but could be in for a bounce, according to a new report from BIMCO.

On August 26, China’s State Council announced new stimulus measures targeting infrastructure. Quotas for infrastructure spending by its banks were increased by RMB300bn ($87bn), on top of a previous RMB300bn in June. “We remain positive that demand from infrastructure projects should improve in the coming months, supported by China’s policies. However, China’s real estate crisis will remain an obstacle to iron ore and steel demand,” commented BIMCO’s chief shipping analyst, Niels Rasmussen.

Questioning this infrastructure spend, however, are analysts at brokers Braemar. “Traditional infrastructure projects are hard to come by. In fact, investment in railways and road transport declined by 4.4% and 0.2% respectively in the first six months of 2022,” Braemar noted in a new report, suggesting that China has prioritized digital infrastructure schemes, water conservation projects, solar and wind power plants. China has long planned to shift its growth engine from property-heavy investment to consumption. Such a reorientation of the economy means that Chinese stimulus packages will not generate dry bulk shipping demand to the same extent as previous ones, Braemar suggested, going on to predict that Chinese demand will be less steel-intensive in the future. “China’s long-term dry bulk import growth is set to be more skewed towards aluminum, minor ores, minerals, and base metals, which are primarily used in advanced manufacturing. As a result, the geared ships are primed to benefit from this structural shift,” Braemar predicted. “China’s zero covid policy has greatly affected business and consumer confidence in 2022 and that is clearly visible in the sluggish housing market. Any new and prolonged large-scale lockdowns could, however, threaten a recovery in the housing market and thereby a rise in demand for iron ore. The recent lockdown in one of China’s biggest cities, Chengdu, is proof that risks to recovery remain,” said BIMCO’s Rasmussen.

Discussing the counter-seasonal plummet capes have experienced over the last month, Mark Williams, founder of UK consultancy Shipping Strategy, told Splash: “I think that a hefty dollop of bearish sentiment is weighing down on this market, which should have another two years to run. But this is proving to be a weird year, even weirder than the last two years, and now it looks like a perfect storm of macro bad news plus lower congestion plus weather in China plus energy shortages in China, etc. are all combining to make a weaker freight market than I for one would expect.”

A downcycle is unavoidable for container shipping in 2023-24 and profits will fall by 80%, a report by HSBC Global Research forecasts. After two years of unprecedented rises container freight rates were seen as having peaked with a downcycle in 2023 – 2024 driven by overcapacity. However, Parash Jain, Head of Shipping & Ports & Asia Transport Research for HSBC does not believe the sector will return to losses, which have so often characterized it over the last two decades pre-pandemic.

“There are signs that spot rates could fall to pre-pandemic levels swiftly on the widening demand-supply gap (as seen in the BDI), but we maintain that contract rates should settle above their pre-pandemic levels and that capacity discipline will keep spot rates from lingering at trough levels,” Jain said.

He said profits are set to fall from their peak estimated for 2022 but would still be better than in the past. The largest public-listed container line AP Moller – Maersk has forecast EBITDA of $37bn for 2022.

The deep slide in rates from current levels will be driven by a mismatch between container growth and the supply of new vessels. HSBC projects global container trade will decline 2% in 2022 and 3% in 2023 before recovering by 2.5% in 2024. By contrast vessel capacity will increase by 6.2% in 2022, and 6.5% and 8% in 2023 and 2024, respectively. HSBC said it expected the sector to bottom out in 2024, noting its forecasts were well below consensus for 2023 – 24.

Despite the lower profit forecasts HSBC maintaining a buy on two container shipping stocks – Maersk and SITC. “Come 2024 (trough year in this down-cycle), we believe Maersk will have returned just over 50% of its market cap to shareholders and will be valued as a less cyclical business, with non-ocean contributing 44% of its operating profit,” the report said.

Slumping Atlantic market for panamax bulkers is seeing some hope on paper for higher spot rates, but that does not necessarily mean that a floor for spot rates is on the way, a broker said. The average spot rate for the Baltic Exchange’s P7 route from the US Gulf Coast to Qingdao has fallen 19.7% since 1 August to $52.44 per tonne on Thursday, while the P9 leg from Santos to Qingdao has dropped 27.9% to $39.63 per tonne on Thursday. The Panamax 5TC, a spot-rate average across five key routes, has also been on a prolonged downward trend. It has declined 38.1% since 1 August to $11,069 per day on Thursday.

Charterers have been bidding for North Atlantic panamaxes to be laden in the US Gulf Coast and off the northern and eastern coasts of South America, giving a boost to forward freight agreements (FFAs), Barry Rogliano Salles (BRS Group) said. “The North Atlantic TA [transatlantic route] is reaching levels last seen in [the second quarter of] 2020, when the Covid-19 pandemic hit,” the broker said in a report on Thursday. “These bearish facts aside, we do see a rebound in paper this afternoon and some talk on the market that the medium-term outlook in the Atlantic is an optimistic one, such as coal demand from Europe likely to increase again for the winter season.”

Among the latest spot charters, Norden relet the 75,008-dwt Sasebo Ace (built 2011) to Cargill to ship grain from the east coast of South America to the Far East at $14,000 per day with a $400,0000 ballast bonus attached. The ship is to load between 17 to 19 September. At the start of August, a similar vessel fetched a stronger $20,600 per day and a $1.06m ballast bonus for the same route. But FFAs are pointing to forward rates above today’s spot rates for the months, quarters, and years ahead.

October contracts on the 5TC route basket came in at $14,454 per day on Thursday after gaining $1,004 in a day. But brokers and owners should not get too excited over the rising paper market because cargo volumes remain low against ample tonnage in the Atlantic Basin, BRS said. Further, operators may hold onto tonnage until next quarter as they wait for the market to improve. “Safe to say let’s not get our hopes up too soon,” BRS said.

“At time of writing, the paper is showing some strong gains which might make some believe that a floor is in sight. However, when it comes to the physical market, we shall think of walking on eggshells before screaming ‘floor’ from rooftops.”

When London-listed Taylor Maritime Investments floated a $26-per-share cash tender offer for Singapore-based Grindrod Shipping on Monday, the word that stood out was “cash”. Cash simply has not been the main currency used in the past few years to achieve consolidation in the bulker sector. In a twist on the old cliche, shares have been king. “All-cash tender offers are exceedingly rare in shipping,” a ship-finance source said. “It’s similar to someone willing to pay all cash for your house in the real estate market.” In an increasingly uncertain climate for the once-rampaging dry bulk sector, with listed bulker owners having bled hundreds of millions of dollars in share value since June, a question emerges: is the Taylor-Grindrod bid a one-off, or reflective of a paradigm shift in the trade’s mergers-and-acquisitions game? Streetwise found some disagreement on the point, with one well-connected source maintaining there are peculiarities around the deal that warrant caution about declaring a larger trend. We will get back to that view. However, another experienced financier argues that the winds have shifted. “I think paradigm shift is exactly the right way to put it. It’s become much more difficult for a buyer to issue shares in a deal done on a NAV-to-NAV basis given how far share prices have fallen off since the peak of the market in the spring,” he said, referring to net asset value (NAV).

In the current Taylor-Grindrod example, TradeWinds had reported in April that the Singapore-based owner was in play with a pack of public companies, including the likes of US-listed Eagle Bulk Shipping and Genco Shipping & Trading, believed to be in hot pursuit. “You can imagine in that example that if Company A had made a shares-based offer to Grindrod in April or May, while its shares were trading at a robust, market-peak level, that the offer would have become a lot less attractive over the intervening months as those shares lost much of their value,” the source said. According to Jefferies equity analyst Omar Nokta, the dry bulk group under his coverage traded at an average of 90% of their NAV at the market peak in late May. Today, the same group is trading around 60% of NAV. He said every dry owner in the Jefferies group is below NAV. Using the two US shipowners believed to have pursued Grindrod, shares of Eagle Bulk reached a high of $78.75 on 6 June and were around $43.50 on Wednesday, a decline of 45%. Genco’s stock peaked at $27.15 on 6 June and was trading near $13.70 on Wednesday, a fall of about 50%.

The use of shares to buy up companies or fleets has been employed most effectively by New York-listed Star Bulk Carriers. Since 2018, Star Bulk has struck successive deals with Songa Bulk, Augustea Atlantica, ER Capital, Delphin Shipping and the former Scorpio Bulkers, each time acquiring either a full fleet or, in Scorpio’s case, a seven-vessel en-bloc deal. Each time, Star Bulk has used a blend of its own shares alongside cash as payment. Each time, Star Bulk issued that stock at NAV or above. The result is a 128-ship goliath. But the Greek giant is not alone. Others to have used shares in acquisitions include Eagle Bulk, Pacific Basin and even Scorpio Bulkers before its about-face from the dry trade into offshore wind power and rebranding to Eneti. In early August, Greece’s Diana Shipping joined that crowd, doling out shares for about one-third of the purchase price of nine ultramaxes from Sea Trade Holdings. However, Diana was publicly criticized for issuing those units well below NAV. Following a similar course will likely loom as unattractive for many of Diana’s peers. Still, whether the big NAV discounts are short term, or something longer depends much on one’s view of the dry bulk market. Is it set to recover into 2023 with upside prospects fueled by vessel supply that could shrink? Or is there longer-term worry based on prospects for a global recession? A second finance man sees the former and, thus, discounts a new “cash is king” climate as anything long-standing. He also told Streetwise that Grindrod may simply have preferred a cash offer, not least because of the messiness inherent in it having shareholders in both South Africa and New York, with Taylor being a closed-end trust in London. One thing that seems clear is that there is a story to the pursuit of Grindrod that is yet to have fully come out in the wash. But when it does, there will be more to it than a simple cash tender from Taylor. No doubt there were other offers, involving both cash and shares, building up to the Taylor bid sitting on the table in a big green pile.

Capesize woes have entered new depths. The transatlantic C8 route yesterday plummeted into triple-digit territory, coming in at $944 per day, according to the Baltic Exchange, capping off one of the most miserable Augusts on record.

Elsewhere, losses were recorded across the board; the C14 China-Brazil round voyage earnings were at $2,640 a day and on the C10 transpacific round voyage levels were at $4,842 a day. The 5TC was reported at $2,505 a day, around $10,000 shy of covering opex.

While cape backhaul routes have been trading negative for months at a time on a timecharter equivalent (TCE) basis, yesterday’s $944 transatlantic roundtrip rate set a new low, beating a March 2016 record of $1,015 per day on the same route.  “It’s a reasonable bet that capesize spot rates should bottom around here,” commented Dr Roar Adland, a professor at the Norwegian School of Economics.

The big unknown, according to Adland, potentially changing the market structure compared to past dry bulk freight market depressions, is the existence of scrubber-fitted vessels. “Since the Baltic index ship is non-scrubber, scrubber-fitted ships can in theory offer freight rates that push the dollar per day index below zero even for the roundtrips. This would not have been possible in the past,” Adland explained.

“Right now, the challenge in staking out an upward direction in capesize bulk carrier freight rates is two-fold,” argued analysts at Lorenzten & Co in a recent report. Any uptick is riding on an economic recovery in China pushing up requirements for steel and requirements for imports of iron ore, and, secondly, the ability by miners in West Australia and Brazil to come to market with enough cargo. The unwinding of port congestion has been the other more subtle reason for the fading fortunes of the big bulk carriers. “With four months left till the end of the year, a lot must go right in order for Capesize rates to recover back to profitable levels,” a recent report from Breakwave Advisors conceded.

The cape slump is also being felt in kamsarmaxes now approaching opex levels, with the 5TC being at $10,956 a day.