Brief update on a few changes seen around the world this month.  The war in Ukraine can no longer be called the war in Ukraine.  While for much of this year military action was almost exclusively taking place in Ukraine, new over the last several weeks is that many more attacks have also occurred in Russia.  This includes three Ukrainian attacks during this month alone on Russia’s Engels airbase located over 370 miles (600 kilometers) from the Ukrainian border.  Ukraine, of course, has every reason to make their own attacks on Russia.  Overall, the war has escalated further this month and continues to show no sign of coming to an end anytime soon.

In China, the coronavirus surge has not surprisingly continued.  The consensus is that while new cases are skyrocketing, the current coronarius variant spreading in China is not very severe.  Going forward, we will be continuing to monitor China closely.  The government has not at all reversed any reopening plans — but as we discussed earlier today, China clearly has not yet fully reopened.  Also of note is steel production has fallen further.  The most recently released data shows that crude steel output at large and medium-sized mills in China averaged 1.96 MMT during December 11 – 20.  This is 2% less than was seen during the previous ten days and marks the lowest average seen since the first ten days of August.  On a year-on-year basis, though, this production average is up by 4%.

The most recently released data as of December 25th shows that the daily coal burn rate at China’s six major coastal power plants has come in at only 824,000 tons.  This is 1% lower than was seen one week prior and is down year-on-year by 6%.  The year-on-year contraction is of course a negative development.  Thermal coal demand is weaker than normal due in part to the current surge in new coronavirus cases.  While the nation is reopening, it is still undergoing a significant surge in coronavirus cases and has clearly not yet fully reopened.

Also of note is that Chinese coastal coal freight rates have come under additional pressure as demand for thermal coal remains relatively weak.    Coastal coal freight rates have fallen for three straight weeks and are now at the lowest level seen since late January.  The nation remains well supplied with thermal coal, and the coastal coal freight market is suffering as a result.

In a further sign of China remaining well supplied with thermal coal, the government announced yesterday that it will be resuming import tariffs on some coal types with rates ranging from 3% to 6%.  The tariffs will resume starting in April.  We will publish additional information on the tariffs and changes if various coal imports and trading partners are significantly affected.  

Regarding coal import totals by nation, the most recently released data shows Indonesia and Russia again contributed to the vast majority of China’s imports last month.  Of the 32.3 MMT of coal that China imported last month, imports from Indonesia totaled 20 MMT and imports from Russia totaled 7.2 MMT.  Also of note is that 3.8 MMT was imported from Mongolia, 700,000 tons was imported Canada, 300,000 tons was imported the Philippines, and 100,000 tons was imported from the United States.  Last month again saw no coal imported from Australia, South Africa, and Colombia.

Reduced port congestion due to global taming of Covid-19 may lead to a weaker market for dry bulk shipping, according to a market watcher. The pandemic caused supply chain disruption worldwide for the better part of two years that resulted in bulkers sitting at anchor while waiting days and weeks for available berths. Supply tightened like never before as a result, prompting record-high spot rates that led to better bottom lines for owners. For example, average spot rates for capesize bulkers reached almost $87,000 per day in late October 2021. But the port congestion abated months ago as society got back to work thanks to vaccines, so bulker owners may not enjoy such a robust market driven by port delays caused by Covid-19 disruption, Maritime Strategies International (MSI) said. The dry bulk market could be set for a downbeat 2023 with the pain potentially extended into 2024,” it said in a report on the dry bulk market. “Behind the falling earnings picture is the faster than expected unwinding of port delays that kept the market buzzing during 2020-21, with port operations perhaps not far from approaching ’normality’,” the consultancy said.

Covid-19, which is surging in China as the country tries to reopen its society, and geopolitical factors may also hurt the market by lowering demand and hurting fleet utilization, MSI said. “To put it one way, where capesize markets have led towards the end of this year, others will soon follow,” dry bulk analyst Plamen Natzkoff said. “We expect a cyclical downturn in the market over the next two-three years, characterized by pronounced weakness in bulk carrier earnings driven by the continuing erosion of support factors and tepid trade growth.” A potentially weak global economy during 2023 may also put downward pressure on bulker spot rates, but a possible near-term steel-intensive stimulus from China’s government may offset any downward trend, MSI said. “Whilst MSI finds itself unquestionably at the more bearish end of recent dry bulk market commentary from brokers, owners and other analysts, our forecast for dry bulk spot markets in 2023 is not far different from current FFA contracts,” Natzkoff said. “Our analysis suggests that, without the benefit of a relatively small orderbook, market balances won’t begin to tighten again until 2025 with the potential for more meaningful growth in earnings from 2026.” February contracts for capesize bulkers lost $222 per day on Thursday to come in at $7,721 per day, while March contracts slipped $282 per day to land at $9,339 per day, according to data from the Baltic Exchange.

John Kartsonas, founder of Breakwave Advisors, an asset management firm that runs a dry bulk exchange-traded fund, gave a contrarian view on waning port delays. He said port congestion will continue to the benefit of bulker spot rates because port infrastructure lacks the capacity to keep up with trade growth. “I think port congestion is in a secular uptrend, so anytime there is any issue, this tends to spike,” he told TradeWinds. “For now [the lack of port delays] is negatively impacting rates, but that can change in a matter of weeks.” He said China’s current surge in Covid-19 may hurt dry bulk spot rates by temporarily slowing down the country’s economy, but the negative impact is moot because the market usually performs poorly on the first quarter anyway, he said. “But I do believe the chances of a better-than-expected market in [the second quarter] onwards are quite high,” he said. “A lot of negatives are priced in dry bulk, so this time around, unlike last year that a lot of positives were priced in, the surprise will come on the upside.”

A Zodiac Maritime-controlled capesize bulker is one of five dry cargo vessels that have been reported by brokers and cash buyers to have been sold for recycling in the final week of 2022. The 173,000-dwt bulk carrier Cape Osprey (built 1999) was sold for green recycling at Alang at a price of $530 per ldt, or $10.9m, according to unconfirmed reports by brokers over the weekend. Zodiac could not be reached for comment due to a UK public holiday.

The dry bulk downturn has prompted other owners to prune their fleets of older bulker tonnage, giving South Asian ship recyclers a much-needed opportunity to acquire tonnage at the end of what has been a lackluster year on the buying front. Pakistani ship recyclers snapped up a couple of bulkers, according to Singapore-based Star Asia Shipbroking. China’s Fujian Zhenglian Shipping’s 69,300-dwt bulk carrier Jin Hang Zheng Lian (built 1990) was sold at $535 per ldt, or $5.1m on a delivered Gadani basis. Also sold on a delivered Gadani-basis was Belize-registered Jamila Shipping’s 46,600-dwt bulker Jamila (built 1995), which went at $511per ldt, or $4m. Single-ship owner Jamila acquired the ship in April as U Rich from Fujian Shipping. It is unclear whether the recycling sale enriched Jamila’s coffers as the vessel was bought for an undisclosed sum at a time when both its market value and scrap value were well above $4m, according to VesselsValue data. Ship recyclers in Bangladesh will have the opportunity to recycle Minsheng Financial Leasing’s 48,300-dwt bulk carrier Chang Fa Hai (built 1989), which was sold to cash buyers via Hong Kong based intermediary Wantong International on a delivered Chattogram basis at $500 per ldt, or $5.1m. The Chang Fa Hai traded in the fleet of Chinese dry bulk operator CSC Phoenix during its time under Minsheng Financial Leasing ownership. Cash buyer Wirana reported that Fuzhou Xinjiahong Shipping sold its 45,600-dwt bulk carrier Hong De (built 1996) on an as-is basis in the Indonesian port of Batam at $500 per ldt. That price includes sufficient bunkers on board for a delivery voyage to the Indian subcontinent.

While bulk carriers dominated demolition deals this week, container ships continued to trickle in with the reported sale of Euroseas-controlled 5,610-teu Akinada Bridge (built 2001) to Indian recyclers at $596 per ldt, or $14.5m. The price was said to reflect the ship’s high specifications. The Akinada Bridge’s automatic identification system was broadcasting on Tuesday that it was en route to Alang from Indonesia, with its arrival scheduled for 5 January. The ship was until recently chartered to Zim.

Capesize bulker spot rates significantly undulated this past week as global trading of iron ore stutters due to China’s stumbling return to construction, according to an analyst. The Baltic Exchange’s Capesize 5TC basket of spot-rate averages across five key routes gained 26.6% from last Friday to $23,200 per day on Wednesday, but then it dropped 19.2% to just over $18,700 per day by Friday. All told, it closed the week with a 2.4% gain.

The average spot rate for the benchmark C14 iron ore route from Brazil to China had similar ups and downs, jumping 26.5% from last Friday to nearly $18,400 per day on Wednesday before crashing 29.2% to about $13,000 per day on Friday. “The iron ore trade has shown some improvement over the past two weeks, with firmer Chinese steel prices and global iron ore prices,” Jefferies analyst Omar Nokta wrote in a note on Friday. “We note that there have been fits-and-starts with the recovery as steel production remains under pressure worldwide.”

He noted that China’s crude steel production reached 74.5 MMT in November but was still down from 79.8 MMT in October, according to the World Steel Association. Those figures are well below China steel output peaking at 99.5 MMT in May 2021, and production outside of China remains weak with output down 12.6% year-over-year, he said.

Evergrande, China’s largest property developer, provided some help for China’s steel market when it announced on Wednesday that it had resumed work on 631 pre-sold and undelivered projects after receiving special loan money from the government.

As 2022 winds down, Norden is bumping up its full-year expectations. The Danish bulker and tanker owner-operator said on Thursday that it expects to post a profit between $730m to 780m, up from its initial forecast range of $650m to $730m. “Norden continues to capture value in a weakened dry cargo market and a firm product tanker market through strong operational performance in both segments,” chief executive Jan Rindbo said in a statement. “Furthermore, our asset trading approach enables us to realize additional market values from our fleet of owned and leased vessels.”

The Copenhagen-listed company said its freight services and trading segment was coming in stronger than expected in both tankers and bulkers following a record result of $190m for the unit in the third quarter. It also said that its assets and logistics business has seen gains on subleases and sales. In November, Rindbo told TradeWinds Norden had significant, profitable dry cargo cover, with bulker earnings outpacing tankers despite the strengthening market there. He said the company would look to start taking more cover from product tankers and reduce the risk posed by bulkers potentially operating in a lagging global economy. Rindbo also said the company, which sold six bulkers and four MR product tankers this year, would likely sell fewer ships moving forward given dwindling opportunities to sell at strong prices. On Thursday, the company’s shares jumped DKK 7.40 ($1.06) to DKK 423.60.

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.

Data released today shows global crude steel production totaled approximately 139.1 MMT last month, which is down month-on-month by 8.2 MMT (-6%) and down year-on-year by 4.2 MMT (-3%).  Particularly noteworthy is that production outside of China totaled only 64.6 MMT.  This is down month-on-month by 2.9 MMT (-4%) and down year-on-year by 9.4 MMT (-13%).  China remains one of only a few major steel producing nations to be experiencing growth in production (India, too, continues to experience growth).

The weakness outside of China continues to come as no surprise and the year-on-year contraction has managed to intensify even further.   The 13% year-on-year contraction seen last month has marked the largest contraction since July 2020.  Global crude steel production outside of China has now contracted on a year-on-year basis for nine straight months.  Production has stayed particularly weak in the European Union and Japan.  EU steel production contracted on a year-on-year basis last month by 19%.  Japanese steel production contracted by 10%.

Capesize bulker rates leapt for the second straight day on Wednesday, reaching their highest point in five months as China starts erecting buildings again. The Baltic Exchange’s Capesize 5TC jumped 18.3% on Wednesday to nearly $23,200 per day, following an 8.2% leap on Tuesday. The jump came as Clarksons Securities noted on Wednesday that Evergrande, China’s largest property developer, announced it had resumed work on 631 pre-sold and undelivered projects. The investment hank said that is a “sign of hope” for the country’s struggling building sector, which helps drive the country’s demand for shiploads of iron ore. But the unit of UK shipbroker Clarksons also acknowledged the growing number of Covid-19 cases in China that makes long-term outlook on construction uncertain.

“However, as we argue in our sector report published today, China will eventually return to normalcy, which will act as a catalyst for the dry bulk market,” analyst Frode Morkedal wrote in a note. Firmer average spot rates for benchmark routes that bring iron ore to China, however, underpinned a strong correlation between China’s real-estate sector and capesize rates. The rate for the C10 roundtrip voyage from Australia to China skyrocketed 34.4% on Wednesday to about $16,600 per day, while that for the C14 trip from Brazil to China gained 13.1% to land at around $18,400 per day. China’s return to construction and higher steel prices in that country since late November have also boosted spot rates by prompting more iron ore imports, Jefferies analyst Omar Nokta said. “Dry bulk fixture activity has been more plentiful over the past week, primarily in the capesize segment, and spot rates have jumped to their highest levels since July,” he wrote in a note on Wednesday.

The Baltic Exchange has reported several capesize fixtures for iron ore to China this week, including three hires on Wednesday. Australian miner Rio Tinto fixed an unnamed capesize on Wednesday to carry 170,000 tonnes of iron ore at $8.90 per tonne from Dampier, Australia, to Qingdao, China, after it gets loaded from 7 to 9 January. Rio Tinto hired an unnamed capesize on Monday to carry the same quantum of ore on the same route at a lower rate of $8.15 per tonne after loading took place from 2 to 4 January. Nokta also noted that the capesize futures market is looking pretty good for the beginning of 2023 because of the increased imports to China. “While a seasonal dip is expected in early 2023, the January capesize contract has jumped past $13,000 per day today, as compared to the November lows of $6,000 per day,” he said. Tight supply has also boosted the capesize market, according to analysts with the Baltic Exchange. “The upward trends came from all key regions today with tight tonnage seen especially for prompt loading windows,” they wrote on Wednesday.

Carnival Corp has reached a fourth-quarter record for customer deposits on future cruises, but the cruise juggernaut is still deep into the loss column because of Covid-19’s financial impact. The New York-listed owner of 95 cruise ships has collected $5.1bn in deposits for the final quarter of its fiscal year, beating the fourth-quarter record of $4.9bn set in 2019 before the pandemic. “Booking volumes strengthened following the relaxation in protocols, cancellation trends are improving globally, and we have seen a measurable lengthening in the booking curve, across all brands,” chief executive Josh Weinstein said in the company’s fourth-quarter earnings report released on Wednesday.

But Miami-based Carnival is still feeling financial pain from Covid-19, posted a $1.6bn net loss for the last three months of its 2022 fiscal year, which ended 30 November. That marks its 10th consecutive quarter of billion-dollar losses, though it is lower than the $2.62bn in red ink during the same quarter in fiscal 2021. On an adjusted basis, the shipowner reported a $1.07bn loss for the fiscal fourth quarter, which is down from a $1.96bn loss a year earlier. And Carnival recorded an adjusted loss per share of $0.85, beating analyst consensus of $0.87 and improving upon the year-ago result of $1.72.

Fourth-quarter revenue came in at $3.84bn, almost triple the revenue collected a year ago but 20% short of revenue for the fiscal fourth quarter of 2019, before the pandemic struck. Bunker costs more than doubled to $580m during the quarter from $282m a year earlier because of higher fuel prices, but the company is trying to offset that cost with air bubbles. TradeWinds reported in early November that the owner unveiled plans to have air lubrication systems on 17 ships, having already installed them on the hulls of seven vessels. Carnival concluded the fourth quarter with $8.6bn of liquidity versus $9.3bn of liquidity at the same time last year, but its long-term debt totaled $32bn, up from $28.5bn a year ago. The company posted a $6.09bn net loss for the first nine months of 2022 versus a $9.5bn net loss a year earlier. Revenue reached $12.2bn for the period, up from $1.91bn during the same timeframe in 2021.