To help boost the economy, Beijing is targeting investments in new energy projects, high-speed rail, and water tunnels. China is pumping trillions of yuan into infrastructure investment, stimulus that could benefit the world’s second-largest economy well beyond this year’s gloom of Covid lockdowns and property market turmoil. Beijing is making 6.8 trillion yuan (about $1 trillion) of government funds available for construction projects, according to Bloomberg calculations based on official announcements. Total spending could be even higher than that, three times that amount, by some estimates once bank lending and corporate funds are added.

After three months of being neutral on the stock, Clarksons Securities has upgraded Golden Ocean’s shares back to a ‘buy’ rating. The upgrade followed shortly after the Oslo- and Nasdaq-listed bulker owner announced second-quarter results that comfortably beat analysts’ consensus estimates. In a note titled “As strong as iron” on Thursday, equities analysts at Clarksons Securities said that Golden Ocean’s risk-to-reward ratio remains “appealing”.

The investment bank has set a target price of NOK 125 ($12.90) for the stock, which closed on the Oslo Stock Exchange on Thursday at NOK 104.25. This is 2.26% higher than on Wednesday’s close. Clarksons estimates that Golden Ocean’s shares are currently trading at net asset value (NAV).

“We estimate that capesize one-year time-charter rates would need to average $20,000 per day to sustain current ship values, which we believe is realistic given the outlook above (our 2023 forecast is $22,000 per day),” said the analyst team, which is led by managing director Frode Morkedal.

“Clearly, there is some risk that the market will remain sluggish for longer than projected, but ship values should be buffered by elevated newbuild prices, where the overall backlog at shipyards indicates considerably greater pricing stability.”

Golden Ocean warrants a premium valuation due to the strength of its balance sheet, which has a net loan-to-value ratio of just 36%, Clarksons said. Golden Ocean’s eco-type and scrubber-fitted vessels also mean the fleet can earn premiums to the going market rates. Clarksons estimates that Golden Ocean’s stock is trading at a price-to-earnings ratio of 6.8 times the bank’s 2023 rate estimates. “We estimate that non-eco capes could fall to $13,500 per day in 2023 while maintaining a price-to-earnings ratio of 10 times,” the analysts said in the note.

More widely, Clarksons Securities said it has a positive, “glass half full” view of the dry cargo market because port congestion in China has normalized and there will be limited supply of further vessels to spot markets. “We anticipate that China could expand economic stimulus, resulting in increasing raw material imports. Autumn is a good season for dry cargo, mainly because iron ore exports from Brazil increase,” the team said in the note.

“The order book is quite low, and we expect net-zero fleet growth in 2023, assuming that ship speeds are reduced to satisfy emissions requirements. Even with sluggish global growth expected next year, we believe the situation for dry bulk is not that bad.”

Journalists call the August holiday period the “silly season” because there is often nothing to write about and the creative imagination kicks in. When I worked on the London Evening Standard many moons ago, a reporter friend brought in a photograph of a frog in his garden taken very close up. We all laughed and used the picture in the paper. The story was embellished the further round the world it went: “London invaded by giant toads” was a typical headline. We don’t have to “embellish” stories here though: in recent days there has been a massive slump in large bulker rates, warnings from a leading ship operator about demand destruction and disturbing economic data coming out of China.

Tanker markets may be booming but will this upturn be short-lived with rough times round the corner and upsets looming, such as the 43% slump in capesize rates seen last week? Certainly, one bulker-heavy company, Norden, is firming its grip on the handrail by ensuring that its 345 dry-vessel fleet is on time charter until 2023. “If we do see an economic downturn or recession, then clearly demand for other dry bulk commodities, iron ore, steel, bauxite, aluminum and so on … will see declining demand,” Norden chief executive Jan Rindbo told my colleague, Holly Birkett, recently. Norden has been benefiting like other dry bulk operators from powerful rate levels earlier in the year. The Danish company has just turned a $32m second-quarter profit in 2021 into $179m earnings this time around.

But the Chinese economy is having a wobble. Central bankers there have just bucked a global trend by cutting rather than raising central bank lending rates for fear it will further stall this key engine of global growth. Chinese retail sales, industrial output and investment all slowed last month and failed to match economists’ expectations. Continued Covid-19 lockdowns and a deepening property crisis have been heavily depressing business confidence, and activity. There are fears that key capesize carryings such as iron ore and coking coal will continue to be less in demand unless the Chinese government itself steps in to boost spending on infrastructure. The $300bn debts of Chinese property giant Evergrande still command attention, as do buyers refusing to pay mortgages on unbuilt homes.

Some shipping analysts expect a dry bulk rates upturn in the fall, but Chris Robertson at Deutsche Bank told my colleague, Michael Juliano, that “there is ongoing fear of a global economic slowdown, which would negatively impact minor bulk demand and mid-sized rates … Clearly, the market is pricing in low charter estimates, but it’s not based on irrational fear”. And a quick glance around a range of economies shows it is not a pretty picture worldwide. The UK is facing the highest inflation level for 40 years while real wages dropped at record levels amid talk of property crashes and an economic slump. Chile is teetering on the brink of recession, while Turkey cut interest rates even as its inflation rate hit a 24-year high. The recent dive in capesize rates was largely attributed by Clarksons Research to China, with some areas coming out of lockdowns allowing more ports to function properly. In April, around 36% of the world’s bulk carriers were tied up in docks somewhere, but this number has now dropped to just above 30%. Still, the Baltic Exchange Capesize 5TC index, which monitors spot rates across five different routes, had dropped from $24,000 per day in a little over a month to $7,000 per day as measured at the end of last week. On Monday and Tuesday this week, the index was down further.

Barring an implosion of the Chinese economy, Clarksons is confident that the wider bulker trade will improve in the second half, boosted not least by the resumption of grain shipments out of Ukraine. There was better news on this front, with Lloyd’s underwriter Ascot Insurance and broker Marsh tying up what it claims to be the first cargo war risk cover for humanitarian food shipments from the war-torn country on the Black Sea. The loss of grain exports from Ukraine combined with heatwaves and declining Chinese imports led to a 5.2% slump in the first half of the year, according to Paris-based broker Barry Rogliano Salles. But a bounce back is predicted for the last six months leading to a full year tally, up 1% year-on-year. Is it silly to be optimistic?

Energy prices are continuing to firm in Europe and weather is driving supply/demand changes across several regions. We look at how these recent developments shape the outlook for seaborne coal demand going forward.

More issues on the way in Australia?

Following the heavily disrupted month of July for Australian coal exports, shipments in August are on track to recover back above 30 MMT. In July, the extreme weather resulted in the country’s lowest level of monthly coal exports on record, amounting to 24.4 MMT. The fall in exports in July added to pressures in other trades for the larger vessels in the Pacific as ships opted to avoid Australia’s east coast. Fresh weather reports suggest more rainfall is on the horizon, as even moderate precipitation can now put pressure on the country’s coal supply chains. Mining pits typically have water storage facilities, many of which will be near capacity following the flooding in July, making further draining more difficult. Current weather forecasts indicate more rainfall is to come in the next couple of weeks, in which we could see another slowdown in coal shipments in the region as we did in July, but likely to a lesser extent.

China drought disrupting hydro output

In China, several weather stations along the Yangtze have recorded their highest ever temperatures in the past week. According to Reuters estimates, hydro-to-coal replacement for the rest of the year in China has increased by 16.2 MMT versus last month’s predictions due to the persistent dryness. At present, several cities around the Yangtze River have been asked to reduce their power needs by any means necessary to stabilize the power grid. This has included the industrial and manufacturing sectors such as automobiles, batteries, and solar manufacturing. While positive for Chinese coal demand, it is not likely the country’s seaborne interest will see any significant increase as a result. The sharp rise in domestic coal production and weak industrial demand for coal in recent months has allowed for inventories to grow at power utilities in the country and therefore the situation is still manageable without a scramble for seaborne volumes. Average daily coal imports in China currently lie at 847k tons in August, 17.1% below that of August last year. Practically all the coal volumes arriving on bulk carriers to China have come from Indonesia and Russia. In July, Chinese imports of Russian coal hit their highest level on record at 7.5 MMT. However, 87% of these volumes loaded at Russia’s far-eastern ports, such as from Shakhtersk at 1.4 MMT. At 5.5 days (bss Shakhtersk—Qingdao), this voyage is approximately 25 days less than that from Taman in the Black Sea for example. Therefore, despite the increase in coal shipments from Russia to China, this has not provided the surge in bulk carrier demand that may have been expected if most volumes originated in the Black Sea.

Rhine water levels back above minimum

Following weeks of falling water levels on the Rhine, which inherently reduced ARA ports’ capacity to discharge coal, some relief has come with wetter weather as the river have returned above the minimum level for barges. Subsequently, coal stocks have started to fall at ports in the region. Europe has continued to re-commission power plants for increased coal burn as the bloc plans for declining natural gas supplies from Russia, which bodes well for further increases in European coal purchases on the seaborne market. In July, European coal imports totaled 11 MMT, falling for the third consecutive month. August imports have averaged 381k tonnes per day, suggesting a total of 11.8 MMT for the month, still lower than arrivals in both April and May. Germany has also agreed on legislation this week that will see priority on the country’s rail network given to energy transport. This has come in response to the situation on the Rhine. Again, this move should improve inland logistics for coal in Europe which the river levels severely disrupted in recent months. Overall, we continue to see strength in European seaborne coal demand and the easing of inland transportation constraints should drive more buying interest from utilities, which have mildly slowed down ordering in recent weeks.

Bulker owner Golden Ocean Group has booked another profitable quarter and upped its dividend to shareholders. The Oslo- and Nasdaq-listed shipowner recorded $163.7m in net profit for the second quarter, equivalent to earnings per share of 83 cents. This is up from $104.5m during the same period last year, when earnings per share were 63 cents for the company, which counts shipowner John Fredriksen as its biggest shareholder. Golden Ocean has continued to pay out to shareholders and has declared a dividend of 60 cents per share for the second quarter, 10 cents more than for the first three months of the year.

The shipowner’s chief executive Ulrik Andersen said his company had delivered a “strong” result, “despite trade disruptions and economic headwinds. Our performance is attributable to the strength of our commercial operations as well as the quality of our fleet, which allowed us to generate a solid premium to benchmark rates,” he commented in the firm’s financial report.

The firm’s bottom line grew thanks to a sizeable increase in operating revenue, which was up 15% year on year and totaled $316.7m during the three months. This equates to an average time-charter equivalent (TCE) rate of $29,431 per day for Golden Ocean’s operated fleet of 97 vessels, up from $24,920 per day in the same quarter last year. Golden Ocean’s 56 capesize bulkers earned an average TCE rate of $30,661 per day during the second quarter. Its 35 panamax and three ultramax vessels together earned $27,581 per day on average.

Looking out across the remainder of 2022, Golden Ocean has high levels of forward coverage this quarter for its fleet and will book a gain on two vessels sold in June. Andersen struck an upbeat tone in the firm’s report. “Despite recent weakness in freight rates caused by easing port congestion and the contraction in China’s economy due, in part, to its ‘zero-Covid’ policy, our market outlook remains optimistic,” he commented. “Slowing fleet growth and new environmental regulations provide a strong offset to a potential short-term slowing of demand growth which combined with our charter coverage and superior fuel economics from our modern fleet will support continued healthy returns.” For the third quarter, Golden Ocean has 80% of its available capesize days booked at an average rate of $27,900 per day and has 96% of its panamax days covered at $27,100 per day. But the firm has left its options more open during the final quarter of 2022. It has forward bookings for 25% of its available capesize days at $29,500 per day on average. Its panamax fleet is booked at an average daily rate of $21,900 for 27% of available days.

The sale of two ultramax bulkers — the 60,300-dwt Golden Cecilie and Golden Cathrine (both built 2015) — for $63m in June is expected to generate a $22m gain when the vessels are delivered by the end of this year. The buyer has not yet been disclosed. Golden Ocean also ordered three kamsarmax bulkers in June at Dalian Shipbuilding Industry Corp (DSIC), bringing its orderbook at the Chinese yard to 10 newbuildings. The kamsarmax trio, which are set for delivery in 2025, will be financed partly from the sale proceeds from the two ultramaxes and with debt financing that has still to be arranged.

In May, Golden Ocean completed a $275m refinancing of 14 capesize vessels that will lower its daily breakeven rate by $500 for the capesize fleet overall.

Spot rates for capesize bulkers dropped further on Wednesday as China’s hurting real-estate industry continues to put the brakes on turning iron ore into steel for buildings. The Baltic Exchange’s Capesize 5TC, a spot-rate average across five benchmark routes, declined 14.7% during the day to reach $5,636 per day, its lowest point in more than two years, when it came in at $6,177 per day on 4 June 2020. “Capesize rates are down again after a bump upwards yesterday with softer iron ore activity continuing to impact overall demand,” Jefferies analyst Omar Nokta wrote in a note on Wednesday.

The C10 roundtrip voyage, which is used mostly to carry iron ore to China from Australia, saw the day’s biggest average spot rate drop among the five key routes, sliding 16.3% on Wednesday to $6,855 per day. The C14 roundtrip that primarily ships the commodity from Brazil to China slipped 13.6% on Wednesday to $5,135 per day.

The World Steel Association has reported that global crude steel production for July declined 6.4% compared to the same month of last year. That contributed to a 5.4% slump for the first seven months of the year, against the same period of 2021, Nokta said. China, which produces 55% of the world’s total amount, saw its steel output slump 6.4% last month, compared to July 2021. The figures showed the same rate of decline for the first seven months of 2022. The country’s demand for iron ore has fallen significantly since last year because of an unprecedented debt and mortgage crisis that hit the real-estate sector after the government called on property developers to pay down loans. Evergrande, the country’s largest developer, is facing $300bn in debt alone while homebuyers refuse to pay mortgages on homes that it has yet to build.

China is expected to issue more economic stimulus to jumpstart an economy that has been hurt by real-estate woes and Covid lockdowns, but capesize rates have plummeted regardless due to market uncertainty.

The 5TC has dropped 77% since late July, 85% since late May and 94% from an historic high of almost $87,000 per day in late October of last year. But the capesize futures market also slumped on Wednesday, though forward curve still pointed to higher spot rates in the months ahead. Front-month forward freight agreements (FFAs) priced at $10,500 per day, after losing $1,032 per day during the day. October contracts slipped 5.4% on Wednesday to $15,546 per day, while November contracts lost $500 per day to land at $16,429 per day.

The maritime corridor set up by the UN to allow the release of grains from war-torn Ukraine is getting busier as demand and confidence grow. A total of 34 vessels carrying 723,886 tonnes of grains and sunflower oil have left the three ports of Odesa, Chornomorsk and Yuzhnyi since August 1, official data shows. While the volumes are a fraction of the usual pre-invasion levels, progress is being made to export the grains stuck in silos to make way for the new wheat harvest.

Most of the vessels traversing the passage are bulk carriers, eight handysizes, five panamaxes and three supramaxes, while 13 general cargo ships and five chemical tankers have also passed through. About 20 of the ships had been stuck in ports when the war broke out. According to data from the Joint Coordination Centre in Istanbul and Lloyd’s List Intelligence, another 20 ships are making their way to Ukraine for the grain trade. The JCC was set up in late July after the signing of the Black Sea Grain Initiative, which was brokered by the UN and Türkiye, and involves Ukraine and Russia.

The opening of the corridor was seen to lend a bit more support to the dry bulk market, when at full tilt, especially for the smaller sizes. However, dry bulk rates have been weakening of late, given bearish views on the global economy, bar supramaxes, which have been on the rise due to increased activity in Asia, namely steel exports from China, and expected strong volumes of corn from Brazil and wheat from Canada.

According to ship brokerage Braemar, a two-tier market is emerging in the Mediterranean, those willing to call in Ukraine or Russia for a premium, and those who are not. London-based consultancy Maritime Strategies International echoed the view, saying ships open for time-charter are increasingly being offered with exemptions for calling Russia or Ukraine, which may result in high freight rate premiums from the Black Sea, while also “increasing the pool of ships outside the region, undermining market balances elsewhere”. 

“The impact on dry bulk carrier demand and earnings has, to date, been minor, but has obvious upside implications,” ship brokerage Simpson Spence Young said. “The size and frequency of shipments will likely accelerate as confidence in the export corridor increases,” it said in a report. However, the reported target of 5 MMT per month “looks ambitious”. Ukrainian grain exports averaged 4.2 MMT per month in 2021, peaking at 6.6 MMT in November. “The successful passage of the first ships will provide encouragement to others but war risks, plus the premium cost of freight and insurance remain obstacles to trade,” SSY said. While the opening of the grain export corridor and the potential for shipments to be scaled up in the coming months put downward pressure on wheat and corn prices, strong global grain demand and reports of hot and dry weather damaging crops in France, Romania and the US kept them elevated compared to recent years, it said. While global supply tightness means demand for Ukrainian grain will persist, there remain uncertainties about the corridor deal, given that it is only initially valid for 120 days, and will need to be renegotiated before the end of November, it added. It could take only one incident to “derail the agreement and break confidence in the safety of the corridor,” SSY said.

Grain exports from Brazil and the US to the European Union have tripled since Russia’s de facto blockade of Ukraine’s ports in March, helped by high temperatures across the EU, according to market data. Brazil’s year-over-year exports leapt to 2.2 MMT for July, while US volumes soared to 1.1 MMT, a Braemar ACM Shipbroking report said. July’s grain exports from Australia rose 13.2% from a year ago. This increase puts Brazil, the EU’s largest grain supplier, on track to export 26.4 MMT to the bloc during the 2022/2023 marketing year that began in June, compared with 8.8 MMT in the prior marketing year.

The drop in volumes from Ukraine also boosted projected US volumes to the EU to 13.2 MMT for the 2022/2023 growing season, up from 4.4 MMT in the 2021/2022 marketing year. Ukraine was the second-biggest exporter at 8.4 MMT during 2021/2022 marketing year, but the Russian siege has lowered export volumes to 500,000 tonnes even after the maritime grain corridor opened on 1 August.

Record-high temperatures this summer have also boosted Brazil and US grain exports to the EU, where there were water restrictions and limited irrigation across France, Italy, and Spain, Braemar noted. The heat, in conjunction with the Russian blockade, forced EU countries to import 46.5 MMT of mostly maize in the 2021/2022 marketing year, up 12% from the previous 12 months. EU grain production has also dropped, so it is expected to increase maize imports by 18.8% to 19 MMT and wheat imports by 12.2% to 5.5 MMT. EU grain exports, mostly of wheat, increased to 5.4 MMT in July, up 47.7% from a year earlier. But the blockade of Ukrainian ports and sweltering summer temperatures across the US and Argentina may hurt global maize and barley exports during the 2022/2023 marketing year, according to the United Nations’ Food & Agriculture Organization. “Although larger expected maize shipments from Brazil and higher demand from the EU have boosted global maize trade prospects since the previous report, FAO’s forecast for global maize trade in 2022/2023 stands 3% lower than the 2021/2022 level,” it said in a July report. As a result, the higher grain exports expected from Brazil may still fall short of compensating for smaller shipments from other countries.

Global wheat trade during the 2022/2023 marketing year is expected to fall by 1.3% to 191 MMT, mainly due to lower Ukraine exports and smaller purchases forecast across Asia. But the opening of the Ukraine grain corridor from the ports of Black Sea ports of Odesa, Chornomorsk and Pivdennyi may offset the expected shortfall, if Ukraine, Russia, Turkey, and the EU continue to agree to keep it open, the US Department of Agriculture said. In its latest monthly report on global grain trade, the department said: “While there is cautious optimism about the deal, several roadblocks exist, namely continuing conflict in and around port infrastructure (including transshipment silos), the demining of ports and routes and persistent high logistical costs related to freight and insurance rates. Grain exports from Ukraine in the past have been highly seasonal, with the largest volumes shipped just after harvest.” Based on this expectation, the department raised the 2022/2023 forecast on Ukrainian maize exports to 12.5 MMT from 3.5 MMT and on its wheat exports to 11 MMT from 1 MMT. “As of this publication, about a dozen ships have left Ukrainian ports, primarily loaded with corn [maize],” it said. “Despite the aforementioned roadblocks to the success of the Black Sea grain corridor, this potential relief valve for Ukrainian grain supplies comes at a timely moment, as exports historically pick up substantially over the next several months.”

Ascot Insurance and broker Marsh have placed the first cargo war risk cover for humanitarian food shipments from Ukraine under a newly arranged policy. The insurance deal comes as there is a marked increase this week in the size — and improvement of the age profile — of ships heading to pick up food exports from Ukraine’s Black Sea dry bulk terminals. Ascot and Marsh, which launched the $50m cargo cover earlier this month, have not named the ship involved in the first placement.

Other unnamed Lloyd’s of London underwriters have joined the Ascot-led cover. “Cargo and war insurance will play a pivotal role in the broader resumption of grain and other vital food exports from Ukraine’s Black Sea ports,” said Marsh head of cargo David Roe.

The facility has now been opened to other Lloyd’s of London brokers to market. “By making the facility available to the clients of Lloyd’s of London registered brokers, it is our hope that we can all work together to support international efforts and help ensure Ukrainian grain reaches the world’s most vulnerable people during this terrible time of conflict,” said Roe.

There has also been a significant increase in the size and value, and improvement in the age profile, of vessels heading for the Ukraine which will increase demand for first-rate insurance cover. Last week TradeWinds reported the average size of vessels heading for Ukraine was 15,000-dwt, with an average age of 20.1 years old, and an average market value of $6.5m.

This week the first panamax bulkers have been fixed for Ukraine humanitarian cargoes as more established players bring larger ships into the trade. The 71,000-dwt Seaeagle (built 1998), operated by Eastern Mediterranean Shipping, is heading for the Illichivisk Grain Terminal. The 76,000-dwt Ascanios (built 2004), controlled by Greece’s Grehel Ship Management, is heading for the TIS Fertilizer Terminal.

Several supramax vessels have also been fixed including the 56,800-dwt SSI Invincible II which, at 10 years old, is the youngest vessel to be fixed for the trade so far. “Since its launch, we have seen significant demand for the product from several clients and brokers. It’s great that this mission-driven initiative is open and able to meet that demand for all who may need it,” said Ascot head of cargo Chris McGill.

The most recently released data as of August 21st shows that the daily coal burn rate at China’s six major coastal power plants has come in at 913,000 tons.  This is down week-on-week by 1%.  Previously, coal burn had set records during four of the prior five weeks.  Despite not setting another record, the 913,000-ton daily burn is still up year-on-year by 18%.

China continues to experience warmer than usual temperatures and a significant heat wave remains in place in parts of the country.  China remains well supplied with thermal coal, however.  The heatwave, and related power cuts, is expected to subside by the end of this month.  Temperatures in Chongqing, for example, have reached a high of 44 degrees Celsius (111 degrees Fahrenheit) this week, but less intense temperatures are predicted going forward, and by the end of the month the high temperature in Chongqing is expected to come in at only 30 degrees Celsius (86 degrees Fahrenheit).  The entire nation is expected to experience cooler temperatures.