The most recently released data as of July 3rd shows the daily coal burn rate at China’s six major coastal power plants has come in at 814,000 tons.  This is 2% stronger than was seen one week prior, marks the highest daily burn seen since January, and is up year-on-year by 7%. 

As we have been highlighting in our research, the ongoing strengthening in coal burn remains very much in line with various coronavirus restrictions recently being eased across China.  Warm weather also continues to contribute to the strong burn, and some regions in China have seen temperatures recently rise to sixty-year highs. Overall, the burn rate remains most important to us for further gauging China’s current industrial production and its near-term industrial production prospects. It is encouraging that year-on-year growth has not only been maintained recently, but that the pace of growth has also continued to increase.

The resource-poor archipelago of Japan finds itself between a rock and a hard place this summer, with power prices sapping the economy and difficult choices to make about the nation’s future sourcing of energy. The issues have become a talking point in the upcoming elections to the parliament’s upper house scheduled for July 10. Tokyo last week initiated a three-month energy saving period for the first time in seven years, asking citizens to go easy on lights, televisions, air conditioning, and heated toilet seats. June was the hottest month the country has experienced since 1875 with utility firms rushing to restart power plants that had been undergoing repairs.

Utility operators need to maintain an electricity reserve rate—the amount of excess supply capacity that can be used to meet demand spikes—of 3%. The Ministry of Economy, Trade and Industry projects that reserve rate will dwindle to 3.1% for three major metropolitan areas in July. Japan’s economy is still heavily dependent on fossil fuels. Renewable energy contributes 18% of Japan’s electricity supply while nuclear energy provides just 4%, having dropped steeply after the Fukushima tsunami in 2011. Japan imports 90% of its energy needs. The war in Ukraine, coupled with a weakening yen, has sent energy costs surging for the island nation where, for instance, the average cost to import a tonne of LNG in the Japanese currency was almost 120% higher in May than a year earlier. Last week Russia moved to transfer the rights of the giant Sakhalin-2 gas project, potentially ditching foreign participation in the LNG project which Japan is heavily invested in. Trading houses Mitsubishi Corp and Mitsui & Co own a combined 22.5% of Sakhalin-2 with roughly half of all output heading to Japan, the world’s third largest economy. Sakhalin is the closest LNG project to Japan, with gas from there taking less than two days to arrive, as opposed to around a month for imports from the US. Sakhalin supplies 9% of Japan’s total LNG imports, the country being the second biggest gas importer in the world after China.

Mitsui OSK Lines (MOL) president and chief executive Takeshi Hashimoto told the Financial Times last week that despite the Sakhalin-2 news, he did not see any way for Japan to reduce its dependence on Russia for gas imports any time soon. “We cannot use many nuclear power stations therefore the supply and demand balance of the power industry is quite tight,” Hashimoto told the Financial Times. “Nowadays, the spot market of both LNG and coal is quite expensive. That is one of the reasons why Japan is so reluctant to stop the LNG imports from Russia.” Japanese prime minister Fumio Kishida has had to navigate a tricky line when it comes to his attitude towards Russia and sanctions in the wake of war with Ukraine. Kishida has vowed to ween his country off Russian coal imports but has not made any similar commitments when it comes to LNG. Japanese trading houses are also co-investors in other Russian energy developments including the Sakhalin-1 oil and Arctic LNG 2 projects.

The energy crunch Japan is facing is spurring debate about the country’s future energy mix with growing calls to reopen long shuttered nuclear power plants and a renewed renewables push. Japan’s first two large-scale offshore wind farms, under construction by Marubeni Corp, are scheduled to come online this year, while 2022 has also seen Kawasaki Heavy Industries kickstart the seaborne liquefied hydrogen trades, sourcing this new energy from Australia. Another new source of energy under development comes from IHI Corp which has created a giant subsea turbine that harnesses the energy in deep ocean currents and converts it into electricity. A prototype of the new system was tested successfully earlier this year with its backers suggesting it could be scaled up rapidly.

Shipowners have just experienced the second-best half-year on record as most markets prospered against a background of geopolitical upheaval. Clarksons Research managing director Stephen Gordon said the “exceptional” six months had followed a period of resilience and then strong recovery in recent years. The cross-segment ClarkSea average of shipping rates hit $38,844 per day for the period, up 7% from the second half of 2021 and 157% above the 10-year average. The figure is only just below the record £39,129 per day logged in the first six months of 2008.

“With geopolitical turmoil added to Covid-19 disruption, shipping has again been placed at the centre of global events,” Gordon said. The 2022 figure was skewed somewhat by container ships, where charter rates rose to another record of $85,731 per day. But nearly all markets are well above trend, Clarksons Research noted.

Bulkers have eased back to $24,440 from $32,519 in the preceding six months. Gordon describes the world economy as a “concern”, but a small orderbook and potential for some Chinese stimulus is more encouraging.

Tanker numbers were buoyed by a very strong performance on products but held back by VLCCs. The average was $25,698 per day, up from three consecutive quarters of below $10,000. Car carriers, supported by congestion, have hit all-time highs and LNG term rates are “unsurprisingly above trend”, said Gordon. Offshore support vessels have also recovered, reflecting an encouraging outlook in utilization.

But Gordon added: “As macro-economic headwinds and inflation pressures build; seaborne trade growth has slowed below trend and needs monitoring carefully.” He is now projecting trade of 12.2bn tonnes this year, down from a 12.4bn forecast at the start of 2022. “For shipping there are some mitigating factors,” the managing director said. “Tonne-mile growth is still close to trend, reflecting changing trade patterns of European imports Russian exports; congestion remains elevated tying up capacity; and a complex sanction regime has created further inefficiencies,” he added.

The global fleet grew 1.4% in the period to reach 1.51bn gt or 2.2bn dwt, with the world’s merchant ships now worth 10% more at $1.4 trillion. “So strong cash flow in most segments but plenty of uncertainties to ponder,” Gordon concluded.

Clarksons report the dry bulk fleet having added 2.1 MDWT in June (0.4m of Capes, 0.8 of Pmax, 0.5 of Supras and 0.4 of Handies), while a total of 0.2 MDWT was scrapped (0.2m of Capes). Annualizing this data implies a run-rate of deliveries at 2.6% and scrapping of 0.2%. After adjusting for other changes in the fleet (conversions etc.), net fleet growth in June was 1.9 MDWT or an annualized 2.4%. As the average speed of the fleet fell, we estimate that effective supply decreased with the equivalent of 1.2 MDWT, resulting in an effective net change of 0.6 MDWT or an annualized 0.8%. Year to date the dry bulk fleet has seen deliveries of 15.6 MDWT and scrapping of 1.8 MDWT. The total fleet as per end of June was 959.3 MDWT, up 1.5% YTD.

Boxport congestion is growing across multiple continents. Clarkson’s containership port congestion index shows that as of last Thursday 36.2% of the global fleet was at port, up from 31.5% in the pre-pandemic years from 2016 to 2019, with Clarksons observing in its latest weekly report that congestion on the US east coast has recently risen to near record levels. “Ongoing disruption caused by port congestion remains extremely supportive to the charter market, despite trade volumes in 2022 so far having come under pressure from a combination of factors,” Clarksons noted. An operational update from German carrier Hapag-Lloyd, issued on Friday, highlighted the myriad congestion issues facing carriers and shippers around the world.

Across key Chinese ports such as Ningbo, Shenzhen and Hong Kong terminals are under pressure with yard and berth congestion thanks to ongoing covid measures and the typhoon season. At other key Asian ports, yard density is reported hitting 80% in Singapore, and is higher still, at 85%, at South Korea’s top port, Busan. In Europe, the start of summer holidays, rounds of strikes, growing covid cases, and bunching of vessels coming from Asia have all transpired to create congestion at many ports, including Antwerp, Hamburg, Le Havre, and Rotterdam. In Latin America, ongoing nationwide protests have hampered port operations in Ecuador, while further north, a cyber-attack, which took out Costa Rica’s customs systems two months ago, is still causing trouble, while Mexico is one of the worst hit by the port congestion contagion with several ports reported to be suffering yard density of 90% leading to severe delays.

Reports of delays at North America’s terminals have dominated shipping headlines throughout the pandemic and remain a cause for concern going into July with Hapag-Lloyd noting waiting times for berths are running upwards of 19 days at New York/New Jersey, while the queue off Savannah is approaching record levels with waiting times there in the region of seven to 10 days. On the west coast, while the spotlight is off Los Angeles and Long Beach for once, Oakland is suffering, with the German carrier warning ships can wait from anywhere between seven to 27 days for a space to open at Oakland International Container Terminal.

In Canada, the situation is dire on the west coast thanks largely to limited rail availability with Vancouver facing “significant delays” according to Hapag-Lloyd, and yard density hitting 90%. At Prince Rupert, meanwhile, the yard is heavily utilized at 113%, and average rail dwell presently stands at 17 days. The increased dwell is due to lack of available railcars.

AIS ship tracking data analyzed by British consultants Drewry has revealed that the number of containerships waiting outside of major ports is indeed growing. “With no changes to our expected supply chain recovery timeline the market will continue to be denied capacity that it otherwise would have had access to,” Drewry stated in a recent report, adding: “We estimate that effective containership capacity will be about 15% below potential this year, following on from a 17% reduction last year.”

Statistics analyzed by Copenhagen-based Sea-Intelligence through to end May show that 9.8% of the global fleet was unavailable due to supply chain delays, down from a peak of 13.8% in January – and down from 10.7% in April. However, shippers have been warned not to celebrate this improvement. The level of capacity removed from the market in May 2022 is still higher than in 2020 and 2021. “This means we are at the beginning of the peak season and the global fleet is already lacking more capacity, than was the case at the same point in time in 2021,” Sea-Intelligence warned. The current dockside woes at the onset of the peak season have yet to translate into any turnaround in spot rates, which, although still at incredibly elevated levels, have been on a downward trajectory for most of 2022

With just 163 days to go until the IMO’s Energy Efficiency Existing Index (EEXI) comes into play, more than 75% of all tankers, bulkers and containerships will not be compliant, according to a new report from VesselsValue.

“The challenge of decarbonization will extend to all areas of shipping, and EEXI alone will present a myriad of challenges to owners, operators and financiers,” the report states.

Writing for Splash earlier this month, Simon Hodgkinson, head of loss prevention at West P&I, suggested that the new rule could be one of the most significant new shipping regulations in years, potentially leading to a fundamental shift throughout the industry.

“Knowledge is a shipowner’s best friend, and owners that do not yet know their EEXI scores should find out as soon as possible. The only way to guarantee a smooth compliance journey as possible is to use this information to start planning now,” Hodgkinson wrote.

Brazil’s iron ore exports ticked up in May, but overall shipments remain behind 2021 levels largely due to a disruptive start to the year caused by heavy rains and

logistical challenges within Brazil. Whereas SH 2021 saw a bounce in global steel production, economic conditions have since deteriorated so there is no guarantee that demand for iron ore will push exports to the same Q3 levels as seen for the past three years.

One negative factor is the iron ore price which has effectively halved since May of last year; though the current CIF price for 62Fe at $124 per tonne is up from the years low $109 of two weeks ago, there is little optimism that prices will rebound to the year’s high $160 in early March as analysts pondered how the annual 45 MMT iron ore exports from Ukraine would be replaced.

With Brazil heavily reliant on China for nearly two thirds of its export market, there are few signs of a sustained economic stimulus from the Chinese government that might accelerate steel production. Investment in infrastructure in China remains weak whilst domestic property newbuilds have contracted nearly 17% y-o-y in the first five months 2022. Though Chinese steel production rose 4.1% in May compared to April, steel mills are facing falling profit margins and rising inventories (stockpiles at major mills were up to 20.5 MMT, +30% y-o-y by mid-June) and it was no surprise that steel exports in May at 8.1 MMT hit a five-year high.

With Brazilian iron ore exports perhaps only reaching 150 MMT for the first six months of 2022, last year’s total exports of 357 MMT seem a long way off, with the current premiums on Q3 and Q4 Capesize FFA’s perhaps predicated on Brazil substantially increasing exports to at least 200 MMT in SH 2022 with the additional tonne-mile demand that this might potentially provide. At present this appears an optimistic forecast!

Cape owners will be hoping that the bottom has been reached in China’s real estate rout, which has hit global iron ore shipments hard in the first half of the year. Housing is a key driver for China’s iron ore needs the nation accounting for roughly 70% of all global seaborne iron ore imports. According to analysts at broker Braemar capesize trade volumes have come in lighter than expected this year due to relatively weak iron ore shipments. “Iron ore exports have disappointed so far in 2022, with total export volumes down around 27 MMT year-to-date versus last year,” a new capesize report from broker Arrow stated.

Splash reported earlier this week how increased coal shipments have helped cushion the capesize blow this year from China’s limited iron ore appetite. The housing boom in the People’s Republic came to a shuddering halt in recent months largely thanks to rolling lockdowns across many cities combined with the shaky financial setup of many of the nation’s biggest real estate developers. The situation has become so desperate that some developers have even resorted to accepting wheat or garlic as down payment. Another state-run developer in Jiangsu province is offering a 90 kg pig, which it will slaughter, free of charge, for anyone buying a house.

Local governments are also doing their bit to prop up the battered real estate scene. The authorities in Yulin in Guangxi province are offering a job to anyone who makes a home purchase. Signs of improvement in the housing market have emerged this week after local governments eased some buying curbs and authorities cut mortgage rates. The 100 biggest real estate developers saw new-home sales slide 43% in June from a year earlier to RMB733bn ($109bn), according to preliminary data from China Real Estate Information Corp. Compared with last month’s, however, their sales climbed 61.2%. New-home sales in 17 cities monitored by China Index Holdings surged 89% in June from a month earlier, also helped by a loosening of covid restrictions. “In the short term, the market has bottomed out, but the recovery is a slow and gentle process and will take time,” China Vanke chairman Yu Liang said at the company’s annual general meeting on Tuesday. Vanke is one of the country’s top property developers.

There are other signs that China’s economy is finally picking up as government eases its harsh covid rules. China’s factory and service sectors snapped three months of activity decline in June. The official manufacturing purchasing managers’ index (PMI) rose to 50.2 in June from 49.6 in May, the National Bureau of Statistics (NBS) said. This marks the first time since February that the PMI has risen above the 50-point mark that separates contraction from growth. A sub-index for production stood at 52.8, the highest since March 2021, while new orders also returned to expansionary territory for the first time in four months, although growth remained weak.

Looking ahead, researchers at dry bulk advisory Commodore Research are confident that China’s iron ore demand will pick up in the coming months. “For the dry bulk market, we continue to expect that an iron ore restock will be occurring in China while Brazilian and Australian iron ore output are undergoing their seasonal strength,” Commodore stated in a report published this week, adding: “China’s housing market remains weak, but it has at least shown some improvement recently.”

Protesters stormed Libya’s parliament building on Friday and burned offices there.  Much of the unrest has been due to severe power outages in Libya in recent days, and several media outlets have reported that protesters were chanting “we want the lights to work” yesterday. 

The Northern Hemisphere summer is not yet two weeks old and already one nation’s parliament has been torched.  The aftermath has been striking.  Going forward, we continue to anticipate that all of us will end up living through a wild Northern Hemisphere summer that we might never forget.  Sentiment and prices in the energy markets have cooled very recently, but we expect sentiment and prices will very soon heat up again.

China’s ambitious five-year plan to slash reliance on iron ore from Australia, published last year, has increased Chinese investments and construction pace on African mines. China targets Guinea and the Simandou project, the largest untapped deposit on the planet, to become their iron ore hub with targeted production from 2025. With a capacity of 175 MMTpa, the area can potentially substitute c24% of China’s imports from Australia. Adding the Nimba project in Guinea, estimated to go online by 2026 or 2027, the country is set to become the world’s third largest exporter of iron ore. Other Chinese-led projects are under construction in Cameroon, while the New Tonkolili Project has commenced full-scale production in Sierra Leone.

While all projects in WAF earlier have seen countless postponements, it now seems more likely that they will materialize during this decade. In total, the region can potentially substitute 38% of China’s imports from Australia, consequently adding favorable tonne-miles to dry bulk shipping demand. West African volumes match Brazilian volumes at around 11.1k nautical miles into China, which compares to 3.6k nautical miles for Australian volumes.

Hence, any shift from Australia to West Africa would more than treble the sailing distance and drive demand for dry bulk vessels.