President Joe Biden recently spoke by phone with several retailers and farmers to discuss ocean shipping costs and the impacts of those costs on their businesses. In a Twitter post that included excerpts of those calls, he said: “One of the reasons prices have gone up is because a handful of companies who control the market have raised shipping prices by as much as 1,000%. It’s outrageous.” Hal Lawton, president, and CEO of Tractor Supply Company, told the president, “We were paying $3,500 a container in 2020, and then by September, October of last year, we were paying upwards of $20,000 to $25,000.” Such increases raised costs for Jo-Ann Stores by almost $100m, said Wade Miquelon, CEO, and president of the company. “We’re not a huge company, but that $100m increase that they passed on to us is more than our entire profit,” he noted. Biden blamed a lack of competition for the issue, saying, “As you know, one of the big reasons why prices are going up is the cost of shipping things – across the Pacific, in particular. There are only nine shipping companies – nine, N-I-N-E – major ocean line shipping companies who ship from Asia to the United States.”

Vincent Duvall, president of the American Farm Bureau Federation, fears losing customers overseas if challenges persist for agricultural shippers. The president has called on Congress to crack down on the global liners. “We’ve got to change this. I asked the Congress to pass a piece of legislation [the Ocean Shipping Reform Act of 2021] to remedy this. Democrats and Republicans voted for it, it’s over in the House of Representatives. I expect it to be voted on shortly, and I expect it to pass. And I’m looking forward to signing it because we’ve got to bring down prices. “The underlying elements of our economy are incredibly strong, stronger than any other nation in the world. But inflation is a problem. This won’t solve it all, but it will solve a big piece of it.”

China imported 92.5 MMT of iron ore in May.  This marks a month-on-month increase of 6.4 MMT (7%) and is up year-on-year by 2.7 MMT (3%).  We continue to stress, there remains a very good chance that imports will climb higher in the second half of this year as iron ore port stockpiles continue to decline and as Brazilian and Australian iron ore production remain poised to undergo seasonal strength.

China imported 20.5 MMT of coal in May.  This marks a month-on-month decline of 3.1 MMT (-13%) and is down year-on-year by 500,000 tons (-2%).  We continue to stress there remains a very good chance that coal imports will contract on a year-on-year basis this year.  China’s domestic coal production has continued to fare much better than thermal coal-derived electricity generation (even before coronavirus issues started to impact thermal coal-derived electricity generation this year).  

China imported 9.7 MMT of soybeans in May.  This marks a month-on-month increase of 1.6 MMT (20%) and is up year-on-year by 100,000 tons (1%).  Going forward, we expect that China’s soybean imports will continue to grow on a year-on-year basis.  Chinese soybean consumption and demand are improving, and the overall prospects for global soybean harvests have also continued to turn more bullish in recent months.

At 914 mdwt, the dry bulk fleet has grown by 1.5% so far this year. We have taken a fresh look at our assumptions for supply going forward and outline some of the results below.

Additions

Starting 2022, Q1 was another quarter of reduced ordering. A total of 117 vessels were contracted over this period, falling for the third quarter in a row. Despite owners having plenty of capital following a strong period of returns last year, most have been reluctant to renew their fleets. In Q2, so far 107 bulkers have been ordered tracking towards a similar level to that of Q1. This can be owed to several themes we have previously discussed, namely regulatory uncertainty and high prices, which some may consider unjustifiable. Slot availability is thin out to 2024 due to the sustained popularity in containerships and gas carriers. Subsequently, we have reduced our expectations for future orders being delivered in 2023 and 2024. While we previously anticipated very limited slippage on the newbuilding market, there has been some indication that the recent lockdowns in China have delayed delivery times. However, we expect this to have a relatively limited effect on deliveries as yards work overtime to meet deadlines. For this reason, we have not changed our slippage assumptions.

Removals

On the other hand, scrapping has declined as fleet renewals have subsided. As a result, we have reduced level of removals from 4.4 to 3.6 mdwt in 2022. Our assumptions on removals are based on the historical percentages of a sector’s overage fleet (20+ years) that have been scrapped, while being able to override this if we expect more (or less) to occur. As the prospect of ordering and receiving delivery of a vessel over a customary timeframe is limited, we expect fewer removals to occur than what we would have typically expected.  Of the 17 vessels scrapped so far this year, 8 have been Capes, driving the share of the sector’s fleet which is overage down to just 1%. With freight rates still at healthy levels across all sizes, we believe vessels will trade for a longer period than they otherwise would have. New IMO regulation incoming in 2023 is similarly playing a role. Given the 20+ year vessels are the least efficient in the fleet, it may be more economical to continue to trade older vessels until this is enforced and then reassess. Therefore, we expect scrapping in 2023 to increase to 5.1 mdwt, closer to levels we formerly expected for this year. As environmental regulation gets stricter beyond 2023, we expect scrapping to increase as the older vessels become less viable. Finally, despite scrap prices in both Turkey and the Indian Sub-Continent reaching multi-year highs, removals remained low. Now that these prices have fallen from their highs, it is clear prolonging a vessels’ lifespan has been the option many have chosen to take.

Capesize fleet growth slowing

The Capesize sector has seen the fewest orders across all dry bulk sectors this year at 11 vessels, with the Handies (40 ships) the nearest across the other sectors. In Q2, only 1 Capesize has been ordered so far compared to 36 over the same period in 2021. Subsequently, we have revised down our fleet size forecast by 3.6 mdwt by year-end 2026, implying a compound annual growth rate (CAGR)  of 1.5% over the 5-year period. The Capes, given their size, are the vessels most prone to competing with the large container and gas carriers currently taking up yard slots. These ships are comparatively more expensive, for example a 174k gas carrier is currently commanding approximately $230m per unit. As a result, yards have driven up quotes for a Large Capesize, which would use a similar size slot, to $67m, given the newfound competition for a yard space. The gas carriers also take circa 4-6 months longer to build, keeping slots occupied for longer periods.

Panamax continues higher

While we see slower growth across the Capesizes, we still see continued popularity in the Panamax segment. By 2026, we expect this fleet to reach 273 mdwt, increasing at a CAGR of 2.8%, the largest across all the dry bulk sectors. However, this has also been reduced from a CAGR of 3.1%. Panamax trade is more diverse, compared to the Capes, and hence presents more opportunities for growth going forward, in Agri bulk and coal for example. It may therefore see a greater surge in ordering when conditions are more favorable. While the 82k dwt Kamsarmax design accounts for the majority of orders, additional growth is coming from the post-Panamaxes. Deliveries of the 93k dwt ship are set to hit their highest level since 2012 in 2023, with 2022 only a few behind. Given their suitability to coal trade and the recent resurgence in coal demand in 2022, we expect orders for these vessels to continue, with some already due for delivery out to 2025. The need for renewals in the Panamax fleet, however, is much larger than the Capesizes, with 13% of the fleet 20 years or older, hence our expectations for greater fleet growth in this segment.

Outlook

Overall, we expect the dry bulk fleet to grow at a compound annual growth rate of 2% over the next 5 years, revised down by 0.2%. A slower rate than we previously expected, this should continue to be a major factor supporting freight rates in the long term. Ordering in the other shipping markets has yet to slow, keeping yard availability low. Despite coming off the highs, steel prices globally remain firm which should support newbuilding prices in the Far East, which could reverse towards the highs given a Chinese economic resurgence. One risk to this outcome is greater clarity on upcoming regulations in 2023, which could trigger a wave of ordering. As of now, the hesitancy weighs on the fact that more-efficient dual-fuel vessels, for example, are priced at a meaningful premium to a standard vessel which are already at multi-year highs. Therefore, it makes sense to wait until confirmation on regulation that will play a large role in dry bulk contracting going forward. While we had previously expected the orderbook to remain low, we believe some hesitancy has arisen following the Ukraine-Russia war, which has created an uncertain economic outlook driven by rising inflation.

Geopolitics has surpassed economics in driving shipping markets, a Posidonia forum has heard. But the profitable new landscape also carries risks, with Braemar head of research Henry Curra highlighting the “guilty pleasure” of supply chain inefficiencies from the situation in Ukraine benefiting shipping. “We’re in a very interesting junction in freight markets,” he told a Maritime London gathering in Athens. “This particular geopolitical situation that we’re facing could extend the strength of freight markets for the next few years to come.” The containers sector is making money “beyond anyone’s dreams” while dry bulk is doing very well and tankers were improving, he said. The smaller liquefied petroleum gas segment is benefiting from busy refineries. Liquefied natural gas has not fared as well, with US-Asia trade was replaced by US-Europe trade, but it was “by far the winner in this whole thing” as Europe seeks to substitute Russian gas supplies. Mr. Curra said rates for ships willing to brave the Black Sea were “extraordinary” but few were willing to load there and many were self-sanctioning.

Shipping was still working out how Europe’s insurance ban on Russian ships would affect global trade. Regulatory uncertainty over future emissions rules also dampened new ordering. “We are entering now a phase where we could see a requirement for more tonnage that simply cannot be satisfied,” he said. The rebirth of the coal trade in response to soaring energy prices had set back decarbonization. And while high fuel costs have encouraged slow steaming, the ‘backwardation’ of the oil market has encouraged tankers to speed up, since their cargoes will be less valuable in future. There was a clear shift to older tonnage, with a big chunk of tanker tonnage approaching 20 years. These could find work on Russia trades such as happened when Iran and Venezuela were slapped with sanctions.

Kirsty MacHardy, a partner at Stephenson Harwood, said London lawyers faced a “tsunami of work” getting to grips with sanctions by the UK and European Union on Russia and asset freezes on oligarchs. These applied not just to legal control but also de facto control of assets. So, an oligarch’s transfer of shares to a family member — say, to reduce their holding to under 50% — created a sanctions risk. She said operators now had to scour their supply chains for Russian links and be careful of cargoes such as coal and fertilizer made from Belarussian potash. “We’ve seen a lot of potential issues … where cargoes of coal are coming out of Estonia. A simple Google search will show you that 90% of coal from Estonia comes from Russia. So, you must be very careful as to where your coal or your cargo is coming from.” Mr. Curra said while many companies were self-sanctioning in response to the risks, “there are still companies willing to take the risk of trading Russian oil and bulk cargoes”.

Baltic Exchange chief executive Mark Jackson said the UK, EU and US governments relied on whistleblowers to find sanctions breaches. “Who is going to whistle blow? It’s going to be your competitor; it’s going to be somebody [who wants] to disrupt your trade,” Mr. Jackson said. “A lot of people fail to realize the fact it isn’t just the government. The government is requiring everybody to make the decision themselves as to whether their activity is sanction busting. And they are requiring your neighbor to ring up and say you are the one doing it.” [Same tactics used by the communist’s that have been castigated by the US/EU/UK for decades!!]

Slow fleet growth should support the dry bulk market even as risks to demand mount, according to shipping association BIMCO. “Although many risks to the global economy and demand for bulk commodities remain, we are optimistic that demand growth in 2022 will match or not be far behind our estimated supply growth,” the Danish group said in an outlook report. It added that a potential rest-of-year increase in average tonne-miles for coal and grains, and a resurgence in China, could add to demand, despite inflation risk curbing demand and uncertainty about the global economy, with growth prospects continuing to be revised downwards.

So far this year, deadweight tonne-miles have risen by 0.6%, while deadweight tonne days are up by 4.8%, mainly due to congestion affecting the capesizes, panamaxes, and supramaxes, with a marginal impact on the handysizes, BIMCO’s chief shipping analyst Niels Rasmussen said on a webinar. Iron ore and grains trades have fallen, while coal movements have increased, driven by appetite from Europe which is banning Russian coal from August given the situation in Ukraine. For grains, which have been acutely affected by the Ukraine conflict, could see future yields affected by constraints on fertilizer supplies, a bulk of which comes from Russia, reaching global markets.

While efforts are being made to find a solution to let grain shipments out of Ukraine through what is called a safe corridor to avert a burgeoning food crisis, no agreement has yet been reached. According to media reports, Russian officials have met Turkish counterparts to try to work on a deal to aid grain shipments, although Russia has said that Ukraine should first clear sea mines to its ports. Russia’s president is also adamant that sanctions should be lifted. 

Iron ore from Brazil has slumped 1.7% in the year to date versus the same period in 2021, while Australian exports are up 0.3%, indicating it is not volumes that are driving rates thus far. Global economic growth is pegged at 3.6%, Mr. Rasmussen said, citing IMF figures. India leads the forecasts with growth at over 8%, while China’s growth is estimated at 4.4%, lower than Beijing’s official target of 5.5%. China’s lockdowns have affected demand for iron and coal, but President Xi Jinping will be looking to ensure a recovery in the second half of the year given his upcoming re-election, he said. As a result, 60% of the issued special purpose bonds have already been allocated for infrastructure projects which is expected to stimulate steel demand. 

For 2023, BIMCO currently estimates higher demand growth as commodity prices and inflation are expected to moderate, while vessel supply will be dictated by decarbonization regulations, which are likely to reduce average sailing speeds. It expects fleet growth of 2.6% this year and 2.5% in 2023, with low demolition numbers expected in the face of strong freight rates, and the lowest contracting since 1999. The orderbook is at 6.6% of the existing fleet. Effective fleet capacity could be cut further, by up to 3%, due to the international regulations that will see limits on engine performance to ensure compliance, according to Mr. Rasmussen. “We therefore expect the supply and demand balance to move in favor of owners.”

Average operating margins for the container industry are unprecedented in the history of shipping. Having gone through all Q1 results, the latest data from Alphaliner shows that the leading carriers are now generating a margin of 57.4%, versus an average of just -0.2% in the decade preceding the pandemic. “The result indicates carriers are making a return before interest and tax of 57 cents on every dollar of sales, with some carriers generating almost 70 cents on every dollar,” Alphaliner stated in its most recent weekly report.

Taiwan’s Evergreen was crowned the winner in the latest quarter. It achieved an operating margin of 68.6%, just slightly higher than compatriot Yang Ming’s 68.1%. The 10 carriers surveyed made a collective operating profit of $43.1bn in Q1 2022. This compares to $15.9 bn in the same period a year earlier. What’s more, even if the spot market wobbles between now and the end of the year, it looks like liners will continue to post extraordinarily strong results, based on the latest slew of long-term contracts signed. Leading carriers are generating a margin of 57.4%, versus an average of just -0.2% in the decade preceding the pandemic

May saw the highest monthly increase in long-term contracted ocean freight rates since Oslo-based Xeneta started tracking these shipments, as the cost of locking in container shipments soared by 30.1%. The unprecedented hike, revealed in the latest Xeneta Shipping Index (XSI) public indices for the contract market, means that long-term rates are now 150.6% up year-on-year. By the end of 2022, the container shipping industry will have earned an unprecedented half a trillion dollars of operating profit from two years of supply chain pain and record freight rates, according to estimates from research firm Drewry. Having made a record $190bn last year according to Drewry estimates, the liner shipping industry is on track to post new profit heights in 2022.

Looking at the latest figures, John McCown from Blue Alpha Capital described liner shipping’s Q1 results as “mind-bending”. The container shipping industry profits in the first quarter of 2022 beat out those of FANG—an acronym for Facebook, Amazon, Netflix, and Google—by 103%, expanding the gap from last year’s fourth quarter when liner industry profits beat FANGs by 14%, according to analysis by Blue Alpha Capital. McCown has maintained his initial profit forecast of $220.5bn for the container shipping industry in 2022.

Is there peril ahead for shipping markets amid growing concern for the global economy? In a panel discussion with industry leaders at the TradeWinds Shipowners Forum in Athens, the answer depended on whether the response came from Greek owners or from JP Morgan’s Andrian Dacy. While the four shipowners cited positive signs for shipping markets, the head of the global transportation group at the US banking giant’s JP Morgan Asset Management pointed to “storm clouds. There’s always a bit of danger when things are good, and the same can be said when things are bad. Ignore the cycle at your peril. I do think there are storm clouds.”

Dacy, whose unit owns a fleet of ships, acknowledged that there is a healthy supply-and-demand balance in certain sectors and new regulatory burdens on shipping that could help the supply side. But he pointed to the mounting risk of a “fully-fledged recession. We are already starting to see inflation coming off as consumer [demand] destruction starts to occur, so I am a little concerned about the container ship space.” Dacy also cited issues in China that present long-term concerns for the capesize bulker market. But he was positive about the gas sector, where he said JP Morgan is putting its money.

Providing a rosier view were Danaos Corp chief executive John Coustas, Capital Maritime & Trading chairman Evangelos Marinakis, Navios Maritime chief executive Angeliki Frangou and StealthGas chief executive Harry Vafias. Coustas expressed optimism that the supply chain disruptions that led to booming box rates would continue. He said his company has long predicted that the normalization of the containerized supply chain will not happen until at least early 2023. Now, other geopolitical events have come into the picture, and they will lead to continued bottlenecks in the shoreside supply chain, pushing container ships to remain longer in ports. Looming environmental rules will also have a negative impact on vessel supply, because of speed reductions. Rising fuel costs will also lead to slowdowns.“In real estate, they say location, location, location. In shipping, its disruption, disruption, disruption,” Coustas said.

Asked about whether an economic slowdown could add to “peril” in tankers, Capital’s Marinakis said the sector has already seen the worst of the demand-side pain from Covid-19, despite continued lockdown measures in China. “I’m quite optimistic that China, eventually towards the end of the year, will open, and consumption will be coming back,” he said. “And of course, we’ll enjoy a much better market for the bigger ships, because on the smaller ships [we] have already seen better markets.”

Harry Vafias, chief executive of LPG carrier owner StealthGas, expressed optimism across the shipping space. He said that it is the first time since 2007 and 2008 that all shipping segments are doing well, except for the VLCC market, which the shipowner expects to catch up. “We are at the point where all different factors point to a better market that will stay for some time — how long, I can’t say,” he said. Vafias’ bullishness is rooted in low yard orderbooks, bottlenecks at ports and the impact of Russia’s invasion of Ukraine. “On top of that we have the fear of owners about new fuels and engines, and that also keeps ordering limited,” he said. “Most of the yards are full for three or four years forward, so even if you have all the money in the world, finding slots for conventional ships is quite difficult.”

Frangou said she is optimistic for bulkers and tankers, where Russia’s war on Ukraine has led Navios to boost estimates for tonne-miles. “We see that the tragic war in Ukraine is suddenly a very positive thing for tonne-miles,” she said, pointing to supply disruption in the oil, gas, and wheat trades. “The disruption is huge.” Navios’ forecast points to a tripling of tonne-miles in dry bulk and product tankers. But Frangou was more cautious about the container ship space, as the pandemic subsides in the West and consumer behavior shifts. “We are all here [at Posidonia]. We are all going out. We are all spending. We are travelling … This will be taking away from the dollars spent on goods,” she said.

The dry bulk market continued to slide on Tuesday because of weak owner sentiment, while the week’s festivities at Posidonia 2022 gave a sense of better days ahead for the sector, market sources said. Bulker spot rates have been falling since late May as China’s zero-Covid policy stunned its economy, but hope is in the Athens air as China’s businesses start reopening, according to dry-bulk ETF trader Breakwave Advisors. “Sentiment drives shipping, and as the bi-annual Posidonia gathering is in full force, we feel the positivity all around us,” the New York-based firm said on Tuesday in a report on dry bulk shipping. “A resurgence of iron ore demand out of China could propel rates to very high levels.”

The Baltic Exchange’s capesize 5TC, a spot-rate average across five key routes, has dropped 42% since 23 May to $22,128 per day on Tuesday. Australian miner Rio Tinto hired two capesizes on Tuesday to carry 170,000 tonnes of ore each from Dampier, Australia to Qingdao, China. An unnamed vessel will do the job at $12.85 per tonne, while the 176,000-dwt Great Jin (built 2010) will do it for $12.95 per tonne. The ships will get loaded from 20 to 23 June. On Monday, Fortescue Metals Group fixed an unnamed capesize to send 160,000 tonnes of ore from Port Hedland, Australia to Qingdao at $12.93 per tonne. Loading is set for 19 and 20 June.

Iron-ore prices have risen steadily over the past week to almost $145 per tonne, according to the New York Mercantile Exchange, as China’s major cities start reopening factories, offices, and restaurants. But the dry bulk market could remain volatile for the rest of the year as port congestion and the conflict in Ukraine continue to disrupt global trade, Breakwave Advisors added. “The current state of dry bulk shipping is the most interesting in years,” it said.

China’s weakened economy, which is in its worst state since the global financial crisis, is of utmost concern to shipping because it demands the greatest quantum of commodities. “For dry bulk, China remains the most important region, and for the current strength in dry bulk shipping to be maintained into next year the Chinese economy needs to rebound soon,” Breakwave Advisors said. “There has been a series of announcements focusing on stimulating the economy over the past several weeks, but we have yet to see any effect on the real economy.”

The paper market indicated the uncertainty on Tuesday as the front-month forward freight agreement rate declined 9.5% to $31,479 per day. But a potential rebound could be steep, driven by tight supply and strong owner sentiment, and possibly send spot rates for dry bulk shipping, to very high levels, Breakwave Advisors said. “We anticipate government actions as it relates to energy security combined with geopolitical developments to drive the flows of commodities transported by dry bulk, and thus, indirectly determine the path of freight rates.”

Breakwave Advisors warned, however, that owners and charterers should also be leery of spot rates for smaller bulkers that have also been trending downward. “Although this is not yet concerning, it could potentially snowball into something more serious as we enter the summer months,” the report said. The panamax 5TC has dropped 16.6% since 23 May to $25,339 per day on Tuesday, while the supramax 10TC fell 6.6% to $28,948 per day. “There was slightly more activity today, however, with a lot of the market seemingly in Posidonia the market did remain quiet with few fixtures reported,” Baltic Exchange analysts wrote on Tuesday in their daily take on the dry bulk market.

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As Shanghai springs back to life after two months of lockdown, congestion at the port is almost back to normal, according to data from VesselsValue.

At the height of lockdown in China’s largest city, average waiting times for tankers, bulkers and containerships at Shanghai stretched to 66 hours in late April. Waiting times have now shortened to 28 hours, just an hour longer than the top end of the range seen at this time of year over the past three years.

Average waiting times for containerships, having peaked at 69 hours in late April, are now down to 31 hours, still some four hours longer than the higher end of the range seen for the time of year over the last three years. Data from Israeli maritime AI firm Windward shows that the length of boxship calls to the port of Shanghai was not critically affected by the lockdown in the city and the ongoing congestion in the area.

Comparing May 2022 to May 2021, Windward’s data shows that the monthly average increased by only 1.2 days, from 17 to 18.2 days, or an increase of 6.9%. But the number of port calls made by container vessels to Shanghai in these two periods dropped 16%, from 1,263 to 1,062.

In terms of the number of vessels currently on their way from Shanghai to Los Angeles and Long Beach, there are currently 29 such vessels with a total carrying capacity of slightly more than 225,000 teu, according to Windward and Sea-Intelligence.

“The Shanghai area is far less congested, which is not surprising, given the relatively new development of the partial re-opening,” a new report from Windward and Sea-Intelligence suggests. “Assuming that trucking capacity returns to normal, we can expect this to pick up significantly during June, as factories are starved for raw material and a significant number of empty containers will need to be inserted into the Shanghai area supply chain to cater for further increases as the peak season sets in,” the report predicts.