The capesize bulker market may get a near-term lift after China implemented less restrictive Covid-19 rules to boost its struggling economy, according to a market expert. The new policy will allow people with mild or no symptoms to isolate themselves at home and will let people travel within the country without taking tests, Reuters reported. After announcement of the eased restrictions, the Baltic Exchange’s Capesize 5TC basket of spot-rate averages across five key routes jumped 6.2% on Wednesday to nearly $13,600 per day. “It seems this is a serious attempt to reopen the economy and most China-focused asset classes are reacting positively,” said John Kartsonas, founder of Breakwave Advisors.

He told TradeWinds that the loosened Covid-19 policy may have helped boost capesize spot rates on Wednesday because these bulkers carry ore that China uses for construction, but it may not be the only reason for Wednesday’s higher spot rates. “The physical market does look tighter than before, and although we are not shooting for the moon here, it seems to me that the chances of stronger rates near term are higher than those for weaker rates,” said Kartsonas, whose New York-based asset management firm runs a dry bulk exchange traded fund. “Although we are at the end of the year, all it takes is some bad weather or delays and the market can move up on that.” China’s relaxation of its Covid-19 policy may also give a lift to the capesize futures market, though seasonality may prevent that, Kartsonas said. “This is not a solution as all these are noise in the big scheme where we are entering a relatively weak period, but China reopening can certainly help offset some of the anticipated weakness in the first and second quarters of the year,” he said.

January contracts picked up $172 to reach $8,579 per day on Wednesday. February contracts gained $122 to achieve $6,179 per day. The Baltic Exchange did not report any capesize fixtures on Wednesday, but analysts said that there was talk of Australian miners BHP and Rio Tinto fixing capesizes for late December to send ore to China at freight rates between $8.45 per tonne and $8.80 per tonne. Capital Ship Management’s 179,000-dwt Amigo II (built 2016) was said to have scored a fixture at $8.55 per tonne, while Maran Dry Management’s 178,000-dwt Maran Guardian (built 2010) was tied to a deal at $8.80 per tonne.

Chinese coal and iron ore imports up MOM as zero-covid loosens
According to Chinese customs authorities, Chinese coal imports came in at 32.3 MMT in November, up 10% MOM but down 8% YOY bringing YTD 10.3% lower YOY. YTD coal imports now stand at 262.4 MMT, compared to 292.3 MMT in 2021, 264.9 MMT in 2020 and the 5-year average of 274.7 MMT.

Iron ore imports came in at 98.8 MMT in November, down 6% YOY but up 4% MOM, bringing YTD 2.2% lower YOY. November imports are broadly in line with 2020 figures and have recovered significantly since the 5-year low in February. Chinese iron ore imports YTD now stand at 1,016.9 MMT, versus 1,038.4 MMT in 2021, 1,073.4 MMT in 2020, and the 5-year average of 1,009.6 MMT.

China’s State Council today reported 10 new guidelines, which will loosen some restrictions under its stringent zero-Covid policy. We highlight the new guidelines will allow for home quarantine for asymptomatic and mild Covid cases, in addition to mostly scrapping Covid testing for entering most public places. The authorities further urge areas which are not designated high-risk to not restrict citizens movements or to close businesses. Hence, the announcement provides some assurance towards a gradual re-opening for the Chinese economy, which should support several shipping segments heading into 2023.

Overall, recovering iron ore imports show signs of improving economic activity on the back of the Chinese governments’ tangible reopening efforts and support to the country’s struggling property sector. We note iron ore prices are up ~30% since the trough in end-October, as expectations for stronger steel and iron ore demand improves amidst a shift away from strict zero-covid policy compliance.

Dry bulk: Vale’s 2023 iron ore guidance broadly in line with 2022 guidance
In relation to the company’s capital markets day, Vale guides for 2023 iron ore production between 310 and 320 MMT. For 2022, the company estimates c310 MMT of iron production, hence in the lower end of its previous guidance of 310-320 MMT. In our July 2022 sector report, we had forecast Brazilian exports to increase c25 MMT versus implied increase of 0 to 10 MMT from the guidance. Vale guides for 340-360 MMT of iron ore production in 2026, increasing to above 360 MMT beyond 2030. We see the updated guidance as a potential negative for dry bulk demand next year but highlight potential upward revisions to production guidance should China continue its reopening efforts into 2023.

Yesterday saw 5,046 new daily coronavirus cases reported in China which has marked the largest number of cases seen during the current surge and the second largest all year (the record stands at 5,659 reported on April 29th).  An additional 4,409 cases were reported today.  As we have continued to stress in our work, the ongoing surge is not resulting in new lockdowns or restrictions.  This remains in stark contrast to actions taken during previous surges.

Also of note is that November’s import data was released.  China imported 32.2 MMT of coal in November.  This is up month-on-month by 3 MMT (10%) but is down year-on-year by 2.3 MMT (-8%). 

Iron ore imports totaled 98.9 MMT.  This is up month-on-month by 3.9 MMT (4%) but is down year-on-year by 6.1 MMT (-6%). 

Soybean imports totaled 7.4 MMT.  This is up month-on-month by 3.3 MMT (80%) but is down year-on-year by 1.2 MMT (-14%). 

Collectively, China’s imports of coal, iron ore, and soybeans totaled 138.5 MMT last month.  This has marked the second largest total seen all year.

Norway’s Hoegh Autoliners has been able to maintain freight rates at all-time highs despite a drop in non-car volumes. The Oslo-listed owner said its vehicle carriers transported 1.4m cbm of cargo in November, and 4.1m cbm including September and October. The average gross freight rate in November was $87.90 per cbm, up 8.9% compared with the average across the third quarter. The net freight rate was $69.90 per cbm, a rise of 11.8%.

The share of high and heavy (H/H) and breakbulk cargoes was down at 25% of the total, against 29% over the last three months, however. Chief executive Andreas Enger said: “In November, we saw high volumes in all trade lanes and all sailings were full. “Despite more car volumes on account of high and heavy/breakbulk, we were able to maintain rates at record levels and the rolling three-month average net rate increased $2.90 per cbm to $69.60 per cbm.”

In a note to clients, Fearnley Securities said the figures suggest that car margins are closing in on those for H/H cargoes. The investment bank is maintaining its positive view on the car carrier sector, where margins and volumes are on the rise. A “solid” fourth quarter is expected, Fearnley Securities added. Hoegh Autoliners is continuing to add valuable car carrier capacity to its owned fleet at bargain prices. Last month, it declared an option in its bareboat charter to buy the 8,500-ceu Hoegh Trapper (built 2016) for $53.2m from Norwegian sale-and-leaseback company Ocean Yield. The average market value of the vessel estimated by three different brokers was $96m at the end of September. VesselsValue estimated the Hoegh Trapper was worth $106.8m at that point.

CMA CGM reported a strong revenue of close to $20bn for the third quarter of 2022, up 30% from the same period of last year. The strong result was mostly driven by the group’s maritime shipping business which amounted to $15.7bn, up 25.8% year-on-year, but down 2% compared to the previous quarter.

The French company logged a net profit of $7bn up from $5.6bn in the year-earlier period. Net debt was reduced by $5.3bn. CMA CGM said the third quarter of 2022 was hit by geopolitical tensions, which spurred higher inflation and dragged down consumer spending. The slowdown in shipping demand pushed down spot freight rates, particularly on the main East-West routes. It added the unstable geopolitical situation has led to a rise in energy price which saw its spending on bunkers increase by $822m in the third quarter.

“The CMA CGM Group once again recorded strong results in the third quarter,” said chief executive Rodolphe Saade. “Over the past two years, we have significantly strengthened our financial structure and developed our business through the entire supply chain. In this new environment, we will continue to invest to strengthen our positioning in maritime shipping and logistics, accelerate our energy transition and provide our clients with even more efficient solutions,” he added.

CMA CGM said the outlook for the global economy is uncertain due to geopolitical tensions.

The company expects energy costs to remain high and rising inflation to slow down consumer spending, leading a return to a more normal trade flows and an increasing decline in freight rates.

CMA CGM, which is committed to achieving net zero carbon by 2050, recently launched a $1.5bn green transition fund that will help it to accelerate its energy transition and support the development and industrial-scale production of renewable energy.

Mongolia opens new freight railway to China as countries develop trade ties

Mongolia has opened a new 227km freight rail link from Zuunbayan to Khangi on the Chinese border for exports of coal, iron ore, and copper. The new railway is expected to boost Mongolia’s freight export volume by 30% according to the Mongolian Prime Minister. China is Mongolia’s main trade partner, accounting for 83% of its exports. In recent years, both countries have been working to tap into Mongolia’s vast coking coal reserves, investing in rail infrastructure and mining capacity while agreeing new supply deals. Mongolia’s coal exports declined considerably from 2021 to May of this year due to Covid-19 restrictions on cross-border trade. Trade has since recovered, rising to 23.1 MMT from Jan-Oct 2022, an increase of 66.7% YoY according to the National Statistical Office of Mongolia. We expect this increased rail trade, as well as growing domestic mining capacity in China, to considerably reduce China’s seaborne coal imports in the coming years. China’s seaborne imports totaled 25.8 MMT from Jan-Nov 2022, a decrease of 22% YoY.

Brazil exports first corn cargoes under China phytosanitary deal

Bulkers have started shipping Brazilian corn to China, following the finalization of an agreement between the countries in late October that allows over 100 certified Brazilian companies to export corn to China for the first time. 1.1 MMT of corn has been loaded in Brazil for export to China since October. Almost all these volumes are being shipped on Panamaxes, along with 2 Supramaxes. Certifying Brazilian imports remains complicated, however, and several ships are reportedly being fixed with the option to redirect to another Asian country if the required certification to discharge in China is not received in time. Chinese buyers have been seeking cheaper alternatives to US corn to replace Ukrainian imports that have stopped since the war. China imported 8m tonnes of Ukrainian corn in 2021. Since March, almost all Chinese corn imports have come from the US, totaling 14.2 MMT so far this year. With Brazilian corn sold at a discount to that from the US, we expect to continue to see Brazil grab a larger share of Chinese corn imports, particularly with Ukraine still out of the picture for the most part.

EU iron ore imports fall to lowest level since 2020 in November

The EU’s imports of iron ore totaled 5.7 MMT in November, down 9.6% YoY and the lowest monthly level since August 2020. According to data from WorldSteel, EU countries’ steel production fell 17% YoY in October. The sector has been hit by high energy prices and waning domestic demand amid an economic slowdown, forcing mills to reduce output or close completely. Imports from South Africa saw the biggest decrease, falling by 48.2% YoY to 680,000 tonnes in November. South African ports experienced significant disruptions last month following a train derailment. This has hit demand for Capes and Panamaxes, with volumes falling by 18.3% YoY to 3.2 MMT and 7.9% YoY to 1.8 MMT, respectively. Supras, on the other hand, have seen volumes increase by 24.6% to just over 1 MMT. This has been driven by shipments from Liberia and Mozambique, which totaled 350k and 270k on Supramaxes respectively.

Morgan Stanley has offloaded almost all its shares in Frontline, four days after passing the 5% threshold for ownership disclosures. A filing on Monday reveals that the US investment banking giant now owns just 0.001% of the John Fredriksen-controlled tanker company, which is listed in New York and Oslo. The bank had amassed a holding of 5.25% by 1 December, worth $166m. This had increased from a position of 1.34m shares worth $14.6m on 14 November, according to a US filing. This in turn followed a move in October that brought its stake to 1.18m shares. The shares were trading at $10.33 early in October and are now worth $14.42.

The bank has been contacted for comment. It is not clear whether the stock was being held for its own account or that of a third party.

The 1 December Oslo Stock Exchange filing showed 3.4% of the holding was classed as financial instruments, including call options and the right of recall over securities lending agreements. Other shares were cash swaps and put options.

Morgan Stanley ranked for those few days as Frontline’s second-biggest shareholder.

So far this year, the stock has put on 83%.

Frontline has worked with Morgan Stanley as an agent for share offerings in the past.

The investment bank is a co-owner of LNG carrier company Hoegh LNG.

Frontline’s net profit for the third quarter was $154.4m, compared with a loss of $33.2m in the same period of 2021. Revenue grew to $382.2m from $172m.

The tanker owner is trying to complete a big combination with Belgium’s Euronav.

Frontline may have delayed its third-quarter dividend due to its imminent tie-up with Euronav, but analysts are expecting huge payouts in the future. DNB Markets is projecting shareholder returns approaching $2bn through to the end of 2024 as tanker markets stay “stronger for longer.” This is dependent on Frontline combining its operations with its Belgian partner to create the world’s biggest crude tanker company.

Dividends could reach 30% of the new entity’s market cap, analysts led by Jorgen Lian said. “The combination agreement with Euronav will limit Frontline’s ability to distribute cash dividends near-term, but Frontline still intends to pay out 80% of Q3 adjusted net profit ($66m) once the tender offer is finalized,” they added. A similar 80% pay-out ratio for the final three months would translate to $179m, with another $140m in potential fourth-quarter dividends from Euronav, DNB Markets calculates. “We continue to be bullish on the near-term prospects due to further volume flow disruptions and on the longer-term outlook owing to global oil demand still being in recovery and a record-low orderbook (circa 4% of the fleet),” Lian and his team said. “These factors should prolong the earnings up-cycle,” the analysts added.

The investment bank, which has a “buy” rating on Frontline’s shares, has however cut Ebitda projections by 3% for 2022, based on the owner’s latest rate guidance and current high and low sulphur fuel price spreads. The 2023 and 2024 profit forecasts have been reduced by 2% each. Frontline’s third quarter Ebitda of $148m was below analysts’ expectations at $166m.

The company said last week it will be increasing the scrubber capacity of its fleet as markets boom. The John Fredriksen-controlled owner said additional exhaust cleaner installations are planned on two owned VLCCs to take advantage of much cheaper high-sulphur fuel oil prices. One vessel will be retrofitted in the remainder of 2022 and the second next year.

It appear as the Chinese central government is shifting its approach to Covid. This week, cities and provinces have been gradually lifting lockdown restrictions, likely driven by new economic weakness and widespread protests.

Shenzhen and Shanghai have scrapped the requirement for commuters to present PCR test results to travel on public transport, after Tianjin, Chengdu and Chongqing removed such rules. However, the politburo standing committee, has not yet made an announcement on the official view.

China is the most important country for many shipping segments, especially for dry bulk. The country imports more than 70% of all seaborne iron ore and more than 20% of coal, and a reopening should, all else being equal, be good news for the segment.

On the back of slow activity in China as well as a significant easing of congestion, the peak season has been a disappointment, and we are now heading into what is usually the low season (towards Chinese New Year). As such, we see few immediate triggers, but note that a potential reopening of China would bode well for demand growth in 2023.

We will report much more about China changing, but wanted to put out an update now letting clients know that it does appear that the central government is finally shifting.  Over 4,000 new daily coronavirus cases were reported in China again today and yesterday, but at the same time more provinces and cities have been lifting lockdowns.  Guangzhou in particular this week has announced a lifting of all lockdowns, and Beijing this week has been gradually lifting its own restrictions.  We believe that the protests and riots seen in recent days, combined with recent new economic weakness, has led the central government to finally shift and move towards fully reopening.  Telling now, though, is that China’s iconic Guangzhou Tower last night displayed the message “每一个人都是健康责任第一责任人!” which roughly means “We are all individually the first person responsible for our own health“. 

If ever there was a (literal) sign that reopening is actually coming, it was last night.