Clarksons reports the dry bulk fleet having added 1.4 MDWT in December, while a total of 0.8 MDWT was scrapped. Annualizing this data implies a run-rate of deliveries at 1.7% and scrapping of 1%. After adjusting for other changes in the fleet (conversions etc.), net fleet growth in December was 0.5 MDWT or an annualized 0.7%. As the average speed of the fleet fell, we estimate that effective supply decreased with the equivalent of 2.4 MDWT, resulting in an effective net change of negative 1.9 MDWT or an annualized negative 2.4%.

In 2022, the dry bulk fleet saw deliveries of 30.9 MDWT (3.3% of fleet start of year versus our estimated 3.4%) and scrapping of 4.7 MDWT (0.5% versus our estimated 0.7%). The total fleet as per end of December was 972 MDWT, up 2.8% YOY.

The latest development on the Chinese coal front is a potential easing of the unofficial ban imposed on Aussie coal. China is reportedly in discussions to allow 4 major coal importers to resume buying Australian coal. The ban was implemented in late 2022 due to rapidly deteriorating relations between the two countries. It mainly affected thermal coal shipments.

China used to account for 25% of Aussie coal exports. Australian producers have successfully redirected volumes to Japan, S. Korea, India, and Europe (following the sanctions on Russian coal).

On the other hand, Australia supplied roughly 1/3 of China’s seaborne coal imports. Nowadays, China relies more heavily on Indonesia and Russia to meet its coal requirements, while domestic output and Mongolian imports have also surged to record highs.

Similar discussions were held in July 2022 when Beijing was eager to avoid 2021 power shortages as the European ban on Russian coal was about to kick in and competition for a finite amount of coal cargoes intensified.

We do not anticipate a tangible impact on the market in the short to medium term for 2 main reasons:

1.            There are limited coal volumes available in the spot market. Even an imminent or a complete lifting of the ban would lack the scope to meaningfully alter trade patterns.

2.            The move is thought to be the latest step in Beijing’s efforts to cool down domestic coal prices by rendering more overseas coal available to utilities and steel makers.

Two Asian shipowners, Vietnam’s ITC Corp, and China’s Fuhai Shipping sold their oldest bulk carriers for recycling as 2022 ended. ITC Corp’s 27,00-dwt bulker was sold to cash buyers for onward recycling sale on an as-is basis in Vietnam at $460 per ldt, or $2.9m. This price is lower than recent sales made on a delivered subcontinent basis due to the costs the cash buyer will incur getting the ship to a recycling yard. The sale leaves ITC Corp with six other handysize bulkers, the oldest of which dates from 1995. Fuhai Shipping’s 12,000-dwt mini bulker Fu Ocean (built 1998) has been sold to recyclers in Bangladesh. The vessel is en route to Chittagong, where it is expected to arrive on 11 January. Cash buyers acquired the ship for $498 per ldt on an as-is basis in Batam, Indonesia with enough bunkers remaining on board for its delivery voyage. The Fu Ocean’s departure from the Fuhai Shipping fleet leaves the company with a single Handymax bulker.

Singapore-based cash buyer Wirana Shipping Corporation reported in its latest market report published on Monday that local steel plate prices in India have improved by about $18 per tonne, although imported scrap prices remain static for now. Local rebar prices improved by $10 to $15 per metric tonne due to improved demand from regional markets, mainly from large construction projects. Similarly, while imported scrap prices in Bangladesh remained unchanged over the past week, local steel plate prices increased by $20 per tonne, mainly on account low imports leading to shortage of material in local market. Shipbreakers in India and Bangladesh are offering up to $540 per ldt for tanker tonnage and $530 per ldt for bulkers, with Pakistan offering approximately $20 per ldt more for each type, according to Singapore-based specialist recycling brokers Star Asia Shipbroking. On the container ship front, offers from Pakistan are up to $590 per ldt, while they drop to $580 per ldt from India and $560 from Bangladesh.

With Ship recyclers from Pakistan and Bangladesh presently facing difficulties in opening letters of credit for imports, both Wirana and Star Asia say that India remains the only major destination for recycling of larger vessels on the Indian subcontinent. According to the World Steel Association, India’s steel demand is set for a 6.7% jump, about 120 MMT in 2023, which is the highest growth among major economies. Star Asia, in its latest market report, said buying in India is buoyant at the prevailing levels, with a vast majority of recyclers eyeing larger ships for green recycling and hopeful to see a decent supply in the first quarter of 2023. “For the Indian steel industry, the coming year will be a very promising year. India is in the middle of a building boom with a government initiative of modernizing roads, rails, and ports,” Star Asia said, while noting that while 2022 saw prices fluctuate from a high of $680 to $700 per ldt during the first quarter, to a low of $480 to $500 per ldt due to volatility in domestic scrap prices. “Markets have continued their stability for the past month, giving hopes of revival and gradually forming a trend that was very much needed for the industry,” Star Asia said.

Wirana said the supply of fresh tonnages has not yet increased as expected, and should the supply of fresh tonnage increase, prices offered by ship recyclers could come down. “We have ship recyclers who are waiting to buy fresh tonnage in view of good local demand for steel but are holding back due to expected price decreases. Which way the price will swing will depend on supply of fresh tonnage,” it said. Star Asia also cautioned that complex issues and risks ship recyclers faced in 2022 such as local currency fluctuations and restrictions, and problems obtaining letters of credit in Pakistan and Bangladesh have not gone away. These uncertainties, Star Asia warned, are likely to carry forward into 2023, at least for the initial period.

New York-listed Eagle Buk Shipping completed a bit of Christmas shopping over the holidays, closing the reported buy of the 63,600-dwt Stony Stream (built 2015) for $24.2m. The Connecticut-based owner had been said to be negotiating the purchase without any closure of the deal at TradeWinds’ last report on 19 December. Market sources are now confirming that the ultramax purchase has been sealed, pushing Eagle Bulk’s fleet to 54 vessels.

Eagle Bulk has a policy of not commenting on market rumors, but traditionally has disclosed completed sales with a public statement. The ultramax acquisition, Eagle’s second in 2022, confirms that while the Gary Vogel-led owner may not have fleet expansion or renewal as its top priority, it remains interested in one- or two-vessel style pickups in the secondhand market as prices come off recent highs. The owner also is likely to continue such purchases using cash on the balance sheet to avoid higher interest rates associated with conventional ship-mortgage financing.

The Equasis and VesselsValue databases say the ship, which was built at Chengxi Shipyard in China, is owned by US Bank Equipment Finance, and managed by Nortus Management of Greece. The reported price tag is somewhat lower than the $27.5m that Eagle said it paid in a September deal for the 62,100-dwt Ultra Trust (built 2015), which has since been renamed Tokyo Eagle. Part of the difference may be reflected in a sale-and-purchase market that has seen values slipping since the summer. Ultra Trust also was built in Japan and came equipped with an exhaust-gas scrubber, both factors that would create a price premium.

Eagle has installed scrubbers on 48 supramax and ultramax vessels in its fleet, making it the rare owner in the midsize-tonnage sector to widely employ the equipment. The decision has helped Eagle remain solidly profitable even as rates in the smaller vessel classes swooned in the second half of 2022.

Eagle is one of two US-based owners known to have pursued a larger acquisition in 2022, having joined New York owner Genco Shipping & Trading in investigating a buy of Singapore’s Grindrod Shipping. Grindrod ultimately went to Taylor Maritime Investments of the UK.

China imposes coal import tariffs

The Chinese Ministry of Finance has announced it will reimplement import tariffs of 3% on coking coal, among other types, from 1 April with the aim of supporting domestic producers. The tariffs were previously removed in May as the country aimed for energy security amid a period of soaring coal prices. Coking coal liftings destined for China totaled 28.4 MMT in 2022, a decline of 24.9% YoY and the lowest level in over 5 years. Seaborne imports saw a modest revival in 2H22 as Covid-19 disruptions in Mongolia and China’s western coal producing regions hampered supply chains. The easing of Covid-19 restrictions in December, however, should relieve supply chain pressures within China and thus drive greater domestic substitution of seaborne coking coal volumes in 2023. Despite being subject to the 3% tariff too, Mongolia’s proximity to China and cost-effective rail network will also allow mills to achieve lower prices than can be attained from suppliers further afield.

Chinese bauxite imports strong in December

China imported 12.4 MMT of bauxite in December, rising by 46.3% YoY as seaborne volumes continue to grow for this commodity. At 9.4 MMT, the Capesizes realized most of the benefit as its share of total shipments increased to 75.2% of volumes, the second highest on record. Imports from Guinea totaled 7.9 MMT in December, more than doubling YoY and matching the highest level for this trade in the month previous. Meanwhile, arrivals from Australia increased by 5.5% YoY to 3.2 MMT and Indonesian volumes declined by 35.3% YoY to 1.2 MMT. The strength in bauxite imports has been matched by continued growth in the country’s alumina production, which increased by 12.4% YoY to 6.8 MMT in November.

The Freightos Baltic Index (FBX) was up 6% WOW on 1 January, marking the largest relative gain since August 2021, and still remains 63% above the average level in 2019. Within the index, China outbound rates into US are now broadly back to 2019 levels, while westbound rates into Europe are still nearly 2x the 2019 level and remain strong. Also, European export rates into the Americas remain elevated, with Europe-USEC box rates of USD5,700/FEU is still 3x the 2019 average of USD1,900/FEU.

The SCFI was marginally up WOW for the first time since July to 1,108 on 30 December, but is down 78% YOY which was the peak level during the container boom. Having corrected sharply this autumn (c5% weekly decline on average between September and November), the Shanghai spot index remains 37% above the 2019 levels.

The slight positive bounce in box rates into January comes at a time when liners have traditionally pushed for rate increases. Such increases have historically been more or less efficient longer term depending on the underlying tightness in the market. While a positive shift could be conceived as data point for the market bottoming out, the proof of stagging the rate decline will be in the period ahead. Liners have been blanking sailings in anticipation of lower volumes during the Lunar New Year holidays in China 21-27 January, and some front-end loading of volumes in January tends to provide some relief for the Liners. At the same time, widespread outbreaks of Covid-19 have again affected port efficiency in Asia where we find congestion levels again at record levels (195 vessels of +3k TEU versus the all-time high 196 in August 2021).

In sum, we still believe the container market should continue to struggle in coming months as lackluster demand meets considerable deliveries in 2023 (10% of the fleet for the year, while 3% of the fleet in Q1) and more potential for reversed inefficiencies (8-10% of the fleet is still held up in extraordinary congestion). While Xeneta’s quoted contract rates remained firm for December, the situation only reflects very limited contract negotiations as shippers hold out in expectation of worsening freight markets. As a result, we would expect the liners to adapt to the reality and see a softer approach to its client’s contract commitments to secure sufficient volumes after the immediate supply response of blanked sailings and rerouting has been exhausted.

The dry bulk sector struggled during 2022 as continued lockdowns in China met growing recession fears globally. The result has been freight markets under pressure and steeply discounted equities to our NAVs. However, we find fleet growth constrained on a relatively low orderbook-to-fleet ratio (7%, the lowest on record back to 1996) and believe the 2023 regulations could dent supply.

Meanwhile, the fundamental market balance is already close to an inflection point as illustrated in rather recent market strength through most of 2021 and at times during 2022.

Resurging Chinese demand could thus ignite another bull run in the sector and we see meaningful upside potential to the stocks we cover against limited downside risk which in sum poses an attractive entry point.

The most recently released data as of January 1st shows that the daily coal burn rate at China’s six major coastal power plants has come in at only 803,000 tons.  This is 3% lower than was seen one week prior, is down year-on-year by 6%, and marks the lowest burn rate seen since early December. 

China’s thermal coal demand remains weaker than normal for this time of year due in part to the ongoing surge in new coronavirus cases. 

Also remaining significant for the spot coal and shipping markets is that the nation remains well supplied with thermal coal. 

While passenger travel via road, subways, and air are all increasing (along with some other consumer metrics), industrial markets in China continue to be more significantly affected from the ongoing surge in new coronavirus cases.

Ocean carriers are pulling out the stops to avoid idling container ships as slumping demand shows no sign of receding and freight rates slide. Capacity management measures include diverting ships for longer voyages, super-slow steaming, and deferring newbuilding deliveries, say analysts. These are helping keep idle teu capacity of the commercially active fleet at just 2.2% of the fleet, excluding vessels in repair yards, according to Alphaliner estimates. Several carriers have already begun diverting ships on the backhaul trip from Europe and the East Coast of the United States. The vessels are being sent on the longer route around the Cape of Good Hope rather than through the Suez Canal or Panama Canal. That requires extra vessels and sucks into operation ships that might otherwise be idled. By super-slow steaming as low as 10 knots, the detour from Europe will absorb two extra vessels for every weekly loop, Alphaliner estimates. The route also makes financial sense for carriers and by avoiding hefty fees to transit the canals, it adds.

Vessels taking the detour around the Cape of Good Hope include the 19,970-teu Al Nefud (built 2015), which is operated by Germany’s Hapag-Lloyd. Several ships of The Alliance carriers (Hapag-Lloyd, HMM, Ocean Network Express and Yang Ming Marine) have started diverting ships. That is seen as “a clear sign that excess tonnage is now the bigger problem for carriers while congestion has been relegated to a secondary concern”, according to analyst Linerlytica. Operators are also seeking to defer delivery of many large container ships from late 2022 through to 2023. Mediterranean Shipping Co (MSC) looks set to push deliveries back, with about 20 container ships officially earmarked for delivery in December, said Alphaliner. The 24,116-teu newbuilding MSC Tessa was initially expected to join MSC services in November but has its phase-in postponed to February. “Carries and shipyards have apparently negotiated later deliveries that will turn many a big ship from a 2022-built vessel into a 2023-built ship,” the analyst said.

Carriers are hoping for a pick-up in demand in the coming days to push through a new round of rate increases on 1 January 2023. So far, that looks elusive with freight rates still sinking. Rates from Asia to the US West Coast ended the year at $1,379 per forty-foot equivalent unit (feu), or around 91% lower than the same time last year. Rates from China to North Europe are down to $2,636 per feu, down from close to $15,000 per feu a year ago, according to the Freightos Baltic Index (FBX). Liner operators have unveiled a wave of blank sailings ahead of Chinese New Year when shipments out of Asia are expected to slump further. On Thursday, the 2M Alliance partners Maersk and MSC said they would void the Asia-Europe sailing of the 16,652-teu MSC New York (built 2014). The vessel was scheduled to sail from Ningbo on 4 January. “As a consequence of the forecasted reductions in global demand, Maersk is looking to balance the network accordingly,” the Danish carrier said.

A weakening container freight market has raised the prospect of carriers facing an all-out rate war in 2023. The early Chinese New Year on 22 January means factories in China and Vietnam will be closed for longer than normal. Typically, factories close for a fortnight but are expected to shut in early January for five weeks through to the second week of February. That points to a slow start to the year for liner companies, according to Ocean Network Express (ONE) chief executive Jeremy Nixon. The Asian holidays mean that container volumes that will probably not recover until the second quarter of the year, if at all. “2021 was off-the-charts in terms of volumes, so it is not surprising we see negative growth rates,” Nixon told a recent seminar organized by the Port of Los Angeles.

Nixon said in December that there are signs that transpacific freight rates are starting to bottom out. That is partly due to efforts by carriers blanking sailings as carriers remove capacity to deal with plummeting rates. Spot rates on key trades out of Asia are 90% lower than a year ago. The heaviest falls have been from Asia to the US West Coast (USWC), a trade which had been the engine of the container shipping boom. Rates slumped to $1,379 per forty-foot equivalent unit (feu) in the week before Christmas, down from $14,600 per teu a year earlier. Rates could fall further, particularly for long-term contract rates, say analysts. Contract rates have been sliding for four months, and remain 70% higher year-on-year, according to the XSI index. “This is really just the calm before the storm,” said Patrik Berglund, chief executive of the Oslo-based freight portal Xeneta. “All indicators point towards considerable rate drops from today’s levels, with several of the major Far East trades pointing towards new long-term contracts that are much closer to the currently far lower spot rate benchmarks.” Liner operators normally blank services around the time of Chinese New Year to bring supply in line with demand. That reduction in capacity is not set in stone this year.

In 2021 and 2022, shipping lines kept capacity high to cater to high demand. “This year, deployed capacity during the Lunar holidays is slated to be higher than the deployed capacity in 2021, where demand was absolutely surging,” according to Sea-Intelligence (SeaIntel). This might lead to “another price war, reminiscent of the one we saw in 2015-2016”, the Danish consultancy added. “If demand continues to be sluggish, or outright contracts, given these capacity levels, freight rates will continue to tumble.” According to SeaIntel, Asia to the Mediterranean is the only trade where average capacity growth is close to pre-pandemic levels. “In 2023, there is a high possibility of an all-out price war,” said Christian Roeloffs, cofounder and CEO, of Container xChange, an online platform for container logistics. “It doesn’t seem that the capacity restrictions that we have seen in the past two years are due to return, so we’ll just have ample capacity both on the vessel as well as on the container side,” he said. “With the competitive dynamics in the container shipping and liner industry, I don’t expect especially the big players to hold back, and we do expect prices to come down to almost variable costs. We also foresee market consolidation.”

Carriers can take out more capacity if they need to, so their fate is in their own hands, Benny Huygen, a manager with Kuehne + Nagel in Belgium told a webinar. Carriers are also expected to slow steam to lower carbon emissions. That means liner operators will require additional vessels for services out of Asia. Other vessels are expected to be dry docked and scrapping is expected to pick up. So much of the additional capacity from newbuildings to be delivered next year will likely be needed, said Hapag Lloyd chief executive Rolf Habben Jansen. The coming weeks, therefore, provide an opportunity for shippers to take advantage of the weaker freight market. “Into the year 2023, freight forwarders will be able to go window shopping quite a lot, and there’s going to be a lot of room for negotiation, especially in the early parts of the year,” Roeloffs said.