The world has been turned upside down, this column opined at the start of March following the Russian invasion of Ukraine. Oil prices had hit $130 per barrel, gas values soared, nickel trading was suspended, Ukraine ports were closed, marine insurance rates rocketed, and freight rates gyrated with every new move to ratchet up sanctions. Nearly four months on, both shipping and the wider industrialized world has come to terms with some aspects of the conflict, although oil prices remain high at $117, gas prices are up 77% on this time last year, Ukrainian ports are shut and freight rates unpredictable. Oh, and Russia defaulted on its foreign debt for the first time since the Bolshevik Revolution in 1917. The war goes on and the impacts, while more normalized, are still arguably as traumatic as the Covid pandemic that preceded it. Maybe the world’s not “upside down” anymore, but still “inside out”. And this conflict around the Black Sea has pointed out just how interconnected global trade and its participants have become but how opaque this world remains.

This week, the Indian Register of Shipping (IRClass) pushed aside accusations that it was providing sanctuary to 70 Sovcomflot (SCF Group) tankers that had moved from the Russian flag to the Mumbai-based registry. IRClass argued that “the vessels are operated by various entities in Dubai and in other parts of the world. None of the companies which own the ships are registered in Russia”. IRClass is a member of the blue-chip International Association of Classification Societies along with the likes of Lloyd’s Register, ABS and DNV. The latter three have steered clear of any involvement in Sovcomflot vessels as they moved out of Russia. Have the 70 ships been sold to independent new owners or are they still controlled ultimately by Russian interests? Who knows? IRClass might be less interested in that question because, as it points out, neither the United Nations nor India itself has imposed sanctions on Russia. Narendra Modi, the Indian prime minister, has avoided public criticism of his Russian President Vladimir Putin.

The associated question around Russian shipping is how to deal with those oil and gas exports that have become so important to Western economies. Leaders of the so-called G7 “advanced economies” were huddled together this week in Germany trying to find ways of turning off the financial tap for the Kremlin’s war machine. A cap on Russian energy prices is being considered in a bid to cut Moscow’s revenues and hopefully reduce soaring global inflation. The exact mechanism for doing this, possibly involving limiting the availability of insurance for Russian oil shipments and shipping services, remains unclear and many, including ExxonMobil boss Darren Woods, have questioned whether this is even realistic. And while this is going on, a wider and more important issue is developing around the use of fossil fuels and decarbonization. Not only have these various sanctions led by the US and Europe changed the patterns of trade but they have also led to energy security being prioritized over decarbonization. Many political leaders accept that the long-term solution to dependence on Russian fossil fuels is to move quicker towards renewables. But short-term thinking is different. With Russia threatening to halt all gas shipments to Europe, continental countries are trying to keep open coal-fired power stations that were slated for closure to reduce CO2 emissions. This has wider significance for the maritime world, which had been badly split by arguments over how, or at least how fast, to decarbonize along with all the technological and cost complications.

There can be no doubt that the Ukraine war has reduced some of the immediate pressure on shipowners and others. This is no doubt welcome to the industry, but also dangerous given global carbon emissions are continuing to rise despite the dire consequences longer term. Forward-looking companies such as Danish liner giant AP Moller-Maersk continue to order new methanol-powered vessels: a new mega order is expected shortly. And debates continue over the future role of gas, with liner giant CMA CGM this week showing its hand by signing a multi-year agreement with Shell for LNG supplies to propel its vessels. Liner companies in particular who have been raking in windfall profits from a post-Covid freight rate boom are in a good position to lead the “green” way. But the Ukraine war has accelerated rising interest rates and there are warnings everywhere about a looming global economic recession that could further undermine climate action.

The Ukraine war has boosted the cost of transporting dry bulk such as grains by nearly 60%, stifling trade and shipping in the Black Sea region, an updated United Nations report says. The increase in grain prices and freight rates has led to a near 4% increase in consumer food prices globally, with almost half the impact coming from higher shipping costs, according to the UN Conference on Trade & Development (Unctad). Early in the war, the agency warned of the risk of famine and political destabilization caused by blocking grain trades.

Russian and Ukraine account for 53% of global trade in sunflower oil and seeds, and 27% in wheat. Thirty-six countries import more than half of their wheat from Russia and Ukraine, according to Unctad. It said the search for alternative trade routes has rapidly increased the demands on maritime transport infrastructure and services: “Grain prices and shipping costs have been on the rise since 2020, but the war in Ukraine has exacerbated this trend and reversed a temporary decline in shipping prices. Between February and May 2022, the price paid for the transport of dry bulk goods, such as grains, increased by nearly 60%.”

Before the war, the report said estimates projected 3% growth in global seaborne grain exports, but they are now projected to shrink by 3.8% in 2022. Global shipments of fertilizer, and its inputs such as potash, are projected to drop by 7% this year. However, the falls will be partly offset by increased shipments from other suppliers. Brazil is expected to increase its wheat and coarse grain exports by 37% this year, and supplies from the European Union and the UK are set to grow by 8%. Soybean exports are expected to rise from Argentina, Brazil, and the US. In the medium term, Australia, Brazil, and the US can be expected to compensate for reduced grain exports to North Africa and the Middle East, Unctad said.

Higher energy costs arising from the war have also led to a rise in marine bunker prices, which has been a partial cause of the higher shipping costs. Cargo destined for Russia and Ukraine is piling up at ports, including Hamburg, Rotterdam, Constanta, and Istanbul, with shippers facing delays and a likely increase in detention and demurrage charges. All these factors are driving costs upward as pressure is added to warehousing and storage capacity. Unctad said its simulation concludes that the high container freight costs observed in 2021-2022 will lead to an additional increase in consumer prices of 1.6%, and that global import prices will rise on average by 11.9% as a result of sustained freight rate increases.

While there is now strong evidence that container shipping’s record bull run has peaked, analysts argue that unlike the last time the sector went from peak to trough this time around there’s little chance of tough charter renegotiations. In the wake of 2008’s global financial crisis, many liners found themselves in a precarious financial position. A famous story from that period saw one of the best-known names in container shipping, now deceased, take a suite at the Atlantic Hotel in Hamburg, and summon in a host of German tonnage providers to rip up his charter contracts with them in front of their faces. Similar abrupt charter renegotiations were widespread at the time.

In 2022, liners have taken on a huge swathe of tonnage under onerous circumstances, at very high prices, and for longer periods than normal. The difference this time around as the Shanghai Containerized Freight Index and other indices show signs of slumping, Liners are in an extraordinary cash-rich position, something that should provide some reassurance to tonnage providers as the container market unwinds. Softening spot rates have fallen below long-term contracted rates this month, historically a firm pointer that the container sector is set to fall. Multiple surveys point towards a decrease in consumer demand on the back of soaring inflation. Major retailers have indicated lately inventory overstocking, something that is also pushing rates south. “We are indeed at a turning point in the market,” Peter Sand, chief analyst at freight rate benchmarking platform Xeneta, told Splash Extra. However, Sand said the key difference this time compared to previous turns in the cycle is simple: “Liners are loaded with cash. No one is at the brink of bankruptcy because the blanket has been removed from underneath them.”

In 2021 and 2022, container shipping operators are on track to record all time high combined profits more than $400bn, with operating margins in the most recent quarterly reports on average above 50%. “The kind of money operating owners have made in 2021 and will make in 2022 and 2023 have already paid for future charter hires,” Sand said. Simon Heaney, senior manager of container research at UK analyst Drewry, concurred, saying the current situation is vastly different to the period following the global financial crisis. “Lines will not be able to plead poverty after the bounty of the previous two years, with more to come in our view,” Heaney said, adding: “There is a growing risk for carriers to be stuck with expensive long-term fixtures after the freight rates boom has ended, but they now at least have a very plump cushion to fall back on.”

Hua Joo Tan, who heads up research outfit Linerlytica, said there was no charterer at risk of insolvency at the moment. Jan Tiedemann, a shipping analyst at Alphaliner, agreed with his peers, telling Splash Extra: “Most carriers are sitting on a big fat pile of cash. So even when the economy turns sour, they should be able to pay their bills for the next few years.” Drewry’s World Container Index composite index decreased by 3% last week to $7,285.89 per feu, and is 10% lower than the same week in 2021, but still remains more than $3,500 higher than the five-year average.

It’s been a tricky month reading the markets. After a positive performance in May, the bulk carrier freight market has felt jaded in June. Was it a case of broker absence after all the partying at Posidonia, itself following the jubilee long weekend in the UK? Not really. In fact, the real problem could be that demand fundamentals have begun to weaken as inflation and higher interest rates have filtered through to consumer behavior, reducing global consumption and therefore reducing industrial activity and construction, undermining demand growth for raw materials. Copper prices, a bellwether for the global economy, fell 14% year-on-year to $8,387 a tonne on June 23, a 16-month low. Prices for other industrial metals are also down to year-ago levels in many cases.

The big manufacturing economies are looking weaker than a quarter ago. Germany’s Bundesbank business activity survey is unchanged in the 13 weeks to June 19 compared to the previous 13 weeks, indicating stagnation. Chinese real estate investment fell 4% year-on-year for May after a 2.7% drop in April. Steel output was down 2.3% year-on-year in May and cement output down 17%. Meanwhile, domestic mining output was up 7% year-on-year in May with coal mining output up 8.2%. China’s weekly iron ore imports have been under 18 MMT since May 15 and could be under 80 MMT for June compared to 88 MMT in May. Together these data indicate that urbanization in China, the great driver of bulk commodity demand for the last 30 years, is slowing down. China is also relying more on domestic coal output than previously as international coal prices spike. The question is whether there will be a long-term effect on the bulk carrier freight market or if this will only add to volatility?

High grain prices are affecting trade more than was thought likely even a month ago. Global grain exports were 43.6 MMT in May compared to 54 MMT in May 2021, while estimated second quarter grain exports this year of 125 MMT would be well down on 153 MMT for the second quarter of 2021. One bright spot has been the coal market despite China’s persistence in growing domestic output. Global coal exports for May were just shy of 120 MMT, up from 115 MMT in April and 116 MMT in May 2021. For the first 20 days of June, global coal exports have been 93 MMT, suggesting over 120 MMT for the month.

In the month to June 23, the Baltic Capesize Index has lost 47%, falling from 4,602 to 2,419 points. The two main fronthaul indices, C3 (Brazil-China) and C5 (Australia-China) are down 23% and 22% respectively, while in dollars, C5 is down 47% from $38,169 to $20,061. The Baltic Exchange P5TC average of panamax freight earnings has fallen 19% from $30,394 to $22,709. The Supramax 10 TC average is down 13% from $31,002 to $27,123 and the Handysize 7TC average is down 20% from $29,956 to $24,096. The Baltic Dry Index averaged 2,920 points in May; it looks like it will be under 2,500 points for June, which would run below last year and against seasonal expectations. Was it something we said? Just last month, we wrote that “a theme is emerging here of steady, profitable levels, a kind of sunlit uplands whence owners would be disheartened to depart. Fortunately, the fundamentals of supply and demand, and the auguries of most shipbroker research departments, suggest that their sun-soaked sojourn could last several years yet.” More optimistic market participants might argue that the freight corrections of June are a blip caused by people being away from their desks and that inflation is not the enemy of freight markets. Basis some historical periods of higher inflation, they would be right. Less optimistic market participants might argue that the issue this time is that interest rates are, and wages are significantly lagging inflation, indicating a consumption crunch later this year, while stock markets are already in correction territory and still falling.

It all points to a nervous few weeks until everybody goes away in August, with anxious individuals referring regularly to FFA prices, which still show rising values out to the next quarter (the capesize 5TC is currently priced around $30,000 for September). If sentiment should undermine the futures market in the short term, the holiday season will be a sought-for relief for owners and operators with expensive time-chartered ships on their books.

Bulker owners and operators have been told not to rely on the upcoming efficiency regulations to support rates. Most of the bulk fleet is expected to fit engine power limiters in order to meet the Energy Efficiency Existing Ship Index (EEXI) regulation from January 1, 2023. The kit caps speed, thereby reducing fuel consumption and cutting emissions. Analysis of last year’s trading patterns by London-based consultancy Maritime Strategies International showed average weighted vessel speeds were at 11.3 knots. If these ships had EPLs, actual speed would have been affected by less than 5.5% in more than 90% of cases. Average speeds would have had to have been 1.7% lower to meet the IMO’s EEXI regulations, its calculations showed. But fleet inefficiencies caused by regulation will not be enough to stop dry bulk shipping demand falling between now and 2027, according to senior analyst Will Fray,

A combination of stalling growth on key long-haul dry bulk trades, coupled with an unwinding of Covid-related fleet inefficiencies will see demand for dry bulk tonnage decrease over the next five years — despite strong growth on short-haul intra-regional minor bulks trades,” he said in a report. In MSI’s base case, deadweight demand falls by 1.4%, despite an overall 7% expansion of dry bulk trade. The analysis is contrary to other views in the market that inefficiencies in the fleet (and therefore earnings and asset values) will rise through the next five years as upcoming environmental regulations take effect. MSI expects that easing congestion is expected to more than offset a slowing down of the fleet. In some cases, engine power limitation will be substantial, cutting speeds by more than a quarter. However, in other instances, such as with capesizes, trading speeds will be little impacted by EPLs, and this vessel type may be more prone to scrapping, especially for vessels built before 2007.

MSI expects the Carbon Intensity Indicator (CII) will also have a meaningful impact on speeds. It is forecasting a 2.2% drop in speeds next year versus 2021 levels in its base case scenario, with a 2.8% drop by 2026. “The CII potentially has the power to change the trading patterns of the fleet, favoring longer-haul business and penalizing ports with longer load/discharge times,” MSI said. “It could also lead to seasonal effects where certain trades are favored later in the year for ships which have for the year to date traded with lower emissions efficiency.”

Ed Buttery-led Taylor Maritime Investments (TMI) has revealed it has scrapped a bulker sale announced in March while clinching another disposal. The London-listed shipowner said it has agreed with the buyer to cancel the deal for an unnamed bulker. This is likely to be the 32,600-dwt Happy Hiro (built 2006), one of two vessels TMI sold in March. The handysize went for $12.4m to Chinese interests but was never delivered. The owner said on Monday that the vessel’s value has jumped by more than 10% since the sale was agreed. VesselsValue assesses the Happy Hiro as worth $14.6m. The bulker has now been fixed on a new one-year charter with a yield of more than 40%. The company has been contacted for further information. Meanwhile, TMI has sold another handysize built in 2009 for $17.2m. The company has four vessels built that year, but the one most closely matching the valuation is the 32,300-dwt Golden Bonnie, worth $17.1m. The deal will generate an internal rate of return of 80%. TMI will be left with 27 bulkers and has no other ships contracted for sale currently. The company said the average net time charter rate for the vessels is $20,250 per day, giving an average annualized unlevered cash yield of 29%. This is up from $18,600 per day and a 24% yield on 31 March.

The contracts have an average duration of eight months, up from six months at the end of the first quarter. TMI has covered 53% of the remaining fleet days for the financial year ending 31 March 2023 at an average of $19,700 per day. “This provides strong earnings visibility and certainty, with the opportunity in this good market to secure more charters at attractive rates for the remaining open days for the fleet,” the owner said. Chief executive Buttery said the latest sale allows the company to “crystallize” the increase in asset values since the end of the last quarter. “Meanwhile, yields continue to be strong, and we’ve now locked in a substantial level of revenue across the portfolio at very attractive yields as part of our focus on securing more cover for the fleet going into the summer,” he added. The CEO said this is consistent with TMI’s commercial strategy to have a mix of charter durations to balance revenue optimization and earnings visibility.

The most recently released data as of June 26th shows the daily coal burn rate at China’s six major coastal power plants has come in at 795,000 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 6%. 

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.  Overall, the burn rate remains most important to us for further gauging China’s current industrial production and its near-term industrial production prospects (rather than simply gauging what to expect for coal imports).  It is encouraging that year-on-year growth has not only been maintained recently, but that the pace of growth has also been increasing.

Everything had been going so well. But the correction in the capesize spot market continued Thursday, with average day rates falling back below $30,000 after a three-day rout. Momentum has slowed particularly in the Atlantic market and no new voyage fixtures have been reported in the basin since last week, leaving the market without much clarity on pricing. Baltic Exchange panelists assessed the capesize 5TC rate, the weighted average of spot rates across five key routes, almost 13% lower on Thursday at $28,840 per day. “It’s difficult to pin this crash on a single factor. However, the strength of the recent rally warranted a technical pullback,” Arrow Shipbroking Group research analyst Harry Grimes told TradeWinds. “The medium-term supply/demand dynamics are largely unchanged over the past week and remain positive.”

Rates for round voyages in the Pacific have declined by 20% over the past five trading days due to the number of early ballasters arriving in Australia, shipbroker Fearnleys said in a research note on Thursday. Transpacific round voyages were assessed $4,794 lower on Thursday at $26,188 per day. “Transatlantic trades have fared better in comparison, with limited tonnage supply combined with substantial base commodity volumes to move, pushing daily earnings up some 15% to approach $29,000 [per day],” Fearnleys’ research team said. “Fronthaul iron ore trades still deliver well below expectations.” Round voyages in the Atlantic were assessed $3,211 lower on Thursday at $25,400 per day. Benchmark assessments for iron ore from Brazil going to Europe and China were respectively assessed more than $1 per tonne lower than on Wednesday. The key Brazil-to-China route was assessed at $35.30 per tonne, down by $1.22.

Sentiment in the capesize market has taken a hit due to China’s increasingly challenging economic outlook, according to Ulf Bergman, senior economist, and quantitative analyst for data platform Shipfix. “With the latest round of downgrades to the projections for the year, most economists now expect the Chinese growth to fall well short of the official target of 5.5%,” Bergman told TradeWinds. “The Chinese Premier also suggested yesterday that the Chinese economy is in worse shape now than in 2020 and that more efforts are required to keep second-quarter growth in positive territory.” China has released a 33-point plan to stimulate its economy, but this has failed to excite most observers, he added, and widespread Covid outbreaks mean there is “precious little to suggest that the Chinese will rebound strongly anytime soon. If anything, the longer the Zero Covid policy is enacted, the more likely it is that we will see another round of downgrades to the growth projections,” Bergman said.

Prices for commodities such as iron ore and other metals like copper and aluminum have dipped in recent days due to a weaker demand outlook, he added. Shipfix data shows that there is the possibility of continued weakness in the capesize market. Cargo order data for the capesize segment shows that aggregate volumes globally are well below what has been seen for the same period in previous years. “Our data also highlighted a pickup in tonnage supply earlier this week,” Bergman said.

Chinese port congestion has fallen drastically this week, with the number of vessels waiting outside Chinese coal discharge ports falling to 16, the lowest level since records began in 2015, according to data cited by Clarksons Platou Securities. Congestion outside iron ore discharge ports in China fell to 46 vessels this week, down from 80 vessels a month ago, the firm said. The market dip has prompted “major takers” to move their focus to period deals, Fearnleys’ research team said on Thursday. Forward rate expectations are “contango or close”, the note said.

Fearnleys pointed to the fact a 179,000-dwt capesize built in 2013 was fixed for almost two years at $31,000 per day. This vessel is presumably Diana Shipping’s 179,134-dwt PS Palios (built 2013), which on 23 May was fixed to George Economou-controlled Classic Maritime at $31,000 per day for at least 22 months. Fearnleys quoted $26,000 per day for a five-year period contract for a 181,000-dwt bulker built in 2016.

Overall, we still expect steam coal to play a prominent role in the dry bulk market and continued strength in natural gas prices could secure coal’s role in the global energy mix for a prolonged period. Coal-to-gas forward switching prices in Europe, Japan, and South Korea now all suggest it will be more economical for power plants to burn coal until 2025 at the earliest, implying there will continue to be firm coal demand from these countries going forward. However, some risks to our current outlook remain. China may opt to continue to develop its domestic mining capacity due to high prices on the seaborne market. Further, to reduce reliance on Russian energy supplies the EU and others have committed to ramping up renewable energy spending, the speed of which will determine coal’s role in energy generation going forward. The green energy transition remains the primary risk to seaborne thermal coal trade, although this has been paused in the short-term due to the war in Ukraine, we still see this shift continuing long-term.

After a quiet start to the year, steel exports from China surged ahead in May, the 8.1mt being the highest monthly figure since 2016 and dramatically ahead of earlier months including February when steel leaving China totaled just 3.5 MMT.

To date Vietnam at 2.65 MMT to May is marginally ahead of South Korea (2.61 MMT) as the leading destination for Chinese exports with The Philippines (1.6 MMT) and Thailand (1.5 MMT) next in line, but the big story is the huge increase in Chinese steel shipments to areas of the Mediterranean and the Continent.

Turkey which by end May last year had only imported 0.6 MMT has already received nearly 1.2 MMT whilst Italy which imported about 1 MMT in total last year has already received 0.9 MMT steel from China; in addition, Belgium has imported 0.45 MMT, around a threefold y-o-y increase. Overall Chinese steel exports to the Atlantic increased by nearly 1 MMT in May to 2.4 MMT, again the highest monthly figure since 2015.

Some of the increase in Chinese imports to the Mediterranean and Continent are undoubtedly due to shortages created by the lack of available Ukrainian steel in recent months (last year Ukraine exported 15 MMT mostly to Europe) and even though China’s own production has dropped 30 MMT y-o-y to 434 MMT, China remains the most available alternative supplier.

This uptick in steel exports back to the Atlantic has had a positive knock-on impact on the Supras/Ultras where the highest premiums available (in mid high $30’s on time charter are on the Chinese steel backhaul routes) compared to the mid-hi $20’s on time charter available for Pacific round voyage and US Gulf to Far East business. This increase in ton-mile employment has been a positive for Owners at a time of overall falling demand, but consequently there are nearly 250 more Supras-Ultras positioned to the Atlantic at present compared to this time last year which may act as a brake on any Atlantic market Supramax upturn in second half 2022.