Capesize bulker futures powered further ahead of the spot market on Tuesday as experts said optimism is running vessels for the rest of the year. The capesize 5TC, a spot-rate average across five key routes, improved just $91 to hit $17,804 per day but still fell well short of forward-freight agreement (FFA) figures.

June FFAs improved 4.9% on Tuesday to $33,014 per day, while July contracts rose 3.7% to $35,071 per day. FFAs pointed even higher for the rest of the third quarter, with August contracts gaining $1,004 on Tuesday to $36,929 per day and September contracts rising $1,186 to $38,357 per day.

“There is quite a bit of optimism for the direction of capesize rates,” John Kartsonas, founder of dry bulk ETF-trading platform Breakwave Advisors, told TradeWinds. “I think there are several reasons for that.”

He said it is historically “unlikely” for average capesize rates to remain below rates for smaller bulkers, especially if expected economic stimulus from China boosts iron-ore demand. Further, the capesize sector is heading toward the high-demand season for ore, he said. “Maybe there is a two-way correction down the road, with smaller sizes declining and capesize rates increasing?” he said.

Whatever the future holds, the capesize sector was very quiet on Tuesday. Kepco Tender hired two capesizes to carry 170,000 tonnes of coal, one being a Pan Ocean vessel hired to ship the commodity from Eastern Australia to China at $20.90 per tonne. Loading is set for 16 to 25 May.

In 2021, India was the second largest importer of coal in the world, just after Mainland China, and ahead of Japan and South Korea. India accounted for 15.3% of global coal shipments in 2021. India’s seaborne coal imports in 2021 declined by -10.3% y-o-y to 164.8 MMT, from 183.8 MMT in 2020. In recent years, India has tried to boost domestic coal production as well as shift to greener sources of energy such as natural gas, reducing demand for coal imports. Overall energy demand has also grown more slowly in the past two years due to lockdowns and other Covid-related measures.

In 1Q 2022, India’s coal imports continued in the same negative trend, with volumes down by -13.5% y-o-y to 41.5 MMT, from 47.9 MMT in 1Q 2021. But India’s share of global coal trade increased in 1Q 2022 to 16.3%, given the even larger drop in China’s coal imports this year. In 1Q 2022, China imported just 38.1 MMT of coal, down -36.2% y-o-y from 59.7 MMT in 1Q 2021. China’s share of global coal trade is now down to just 14.9% in 1Q 2022.

Australia has emerged as the top coal exporter to India, as they diverted cargoes that would have been sold to China. Imports to India from Australia increased by +44.9% y-o-y to 64.9 MMT in 2021, from 44.8 MMT in 2020. In 1Q 2022, India imported 14.2 MMT of coal from Australia, down -26.5% y-o-y from a record 19.3 MMT in 1Q 2021. Australia now accounts for 34.2% of India’s coal imports.

The second largest source for Indian coal imports is Indonesia, accounting for a 30.3% share in 1Q 2022. Shipments from Indonesia to India declined by -33.5% y-o-y to 47.4 MMT in 2021, from 71.3 MMT in 2020. In 1Q 2022, India imported 12.6 MMT of coal from Indonesia, -15.5% y-oy from 14.9 MMT in 1Q 2021.

Third placed supplier South Africa’s exports to India declined by -35.2% y-o-y to 23.0 MMT in 2021, from 35.5 MMT in 2020. In 1Q 2022, India imported 6.6 MMT of coal from South Africa, up marginally by +1.7% y-o-y from 6.5 MMT in 1Q 2021. South Africa now accounts for 15.9% of India’s coal imports.

In fourth place is USA. Shipments to India increased by +22.0% y-o-y to 13.7 MMT in 2021, from 11.2 MMT in 2020. In 1Q 2022, India imported 3.6 MMT of coal from the USA, down -2.1% y-o-y from 3.7 MMT in 1Q 2021.

Russia is in fifth place and exported 6.2 MMT of coal, down -1.4% y-o-y in 2021. In 1Q 2022, India received 2.2 MMT of coal from Russia, up by +99.0% y-o-y from 1.1 MMT in 1Q 2021.

The Chicago Board of Trade Corn prices averaged over $782/tonne in April, the second highest monthly price on record. The surge in corn prices this year is undoubtedly linked to the Ukrainian conflict as traders speculate on potential corn shortages later this year; however, world prices have been rising for some time as corn prices rose 54% y-o-y in Q121. Higher, in fact, than this year’s equivalent 25% y-o-y uplift.

Ukraine supplied 25 MMT (16%) of global corn shipments in 2021. With Russia effectively blocking all Ukrainian ports there is little likelihood of further exports soon, though this week a Panamax left Constanza with Ukrainian corn destined for Spain. Evidence shows there has been some planting of corn in recent weeks by Ukrainian farmers but most of this corn will likely be for domestic consumption. So, looking at where replacement corn may be sourced later this year, it appears that increased supplies will come from Argentina and Brazil mostly in the second half of 2022.

The USDA forecasts Argentina’s 2021/22 crop up 6 MMT (+16%) y-o-y to 42.5 MMT and Brazil’s corn crop up 5 MMT (+18%) to 32.5 MMT. With its pig herds now back at pre–African Swine flu levels and on the back of last year’s positive domestic harvest, China is unlikely to require the same volume of corn later in the year. However, many major European buyers, such as Netherlands, Spain, and Italy, purchase at least half of all corn imports from Ukraine. Significant amounts of corn are also imported from Ukraine by Turkey, Egypt, and Israel. Thus, additional corn shipments to Europe and the Eastern Mediterranean could provide a timely second half tonne-mile boost to the Atlantic grain market from these longer haul potential shipments.

Earlier this week, the Panamax vessel “Unity N” left the port of Constanta in Romania carrying 71,000 tonnes of Ukrainian corn. The shipment headed for Spain is the first to leave with Ukrainian corn since Russia invaded on Feb 24. Since the war began, Ukraine’s Black Sea ports have been blocked, forcing the world’s third largest corn exporter to seek different means of transport. Some shipments have been loaded on trains and sent via the country’s western borders, while others

have been sent to Romania via small ports along the Danube River. However, exports by rail are constrained due to the number of wagons available, and the limited capacities at EU borders, where goods must be reloaded due to the different rail gauges. Ukraine’s current grain export capacity is estimated to be around 450-700 K/month, compared with 5.6 MMT/month before the war started.

The northern port of Qinhuangdao in Hebei province is the latest Chinese commodities hub to get hit by virus-related lockdowns as China’s top politicians discuss urgent stimulus measures to pump-prime the national economy. The city has locked down its Haigang district, which includes the giant coal handling complex, although officials at the port claim it is operating normally. Nearby Tangshan, China’s largest steel producing city, has also been in lockdown for much of April.

On Tuesday president Xi Jinping called for an “all-out” infrastructure splurge to promote growth with his government meeting today to discuss what measures ought to be taken. Xi has called for more projects in transportation, energy, and water conservancy, as well as new facilities for supercomputing, cloud computing and artificial intelligence.

The politburo meeting held today in Beijing issued the following communiqué: “The epidemic must be prevented, the economy must be stabilized, and development must be safe.” Specifics of any stimulus package have yet to be revealed. Similar infrastructure splurges in the past have provided a big boost to the dry bulk shipping market. Citi analysts believe China’s infrastructure investment is likely to surge by 8% in 2022, sharply higher than the 0.4% increase seen in 2021. “The infrastructure push is real,” they wrote Wednesday in a note. “The turning point for real policy actions may have arrived, and stimulus will likely come through more obviously from late Q2.”

Shanghai, in lockdown for the past month, reported its first increase in Covid-19 cases in six days yesterday with all indications suggesting it will be mid-May at the earliest before daily life in China’s largest city gets back to some semblance of normality. According to S&P Global Market Intelligence, the total congestion level at ports across Shanghai has increased by about 30-40% as of April 25 since the start of March 2022. Shanghai International Port Group (SIPG) is offering a 50% discount on container storage fees to help ease the financial fallout of the five-week long lockdown on shippers.

Citing satellite data, Bloomberg reported earlier this week that Chinese port activity has fallen below levels seen during the first coronavirus outbreak in 2020 and construction has plummeted. Beijing reported 49 cases for Thursday, down slightly from 50 on Wednesday, leading citizens in the capital to hope that the ongoing mass testing and lockdowns of certain apartment complexes will be as severe as it gets.

Hangzhou, an e-commerce hub near Shanghai, started a mass testing drive earlier this week while the massive southern city of Guangzhou cancelled hundreds of flights on Thursday and began testing 5.6m people over one suspected Covid-19 case.

The International Monetary Fund (IMF) has looked at container freight rates and crunched the numbers to work out what today’s sky-high shipping costs are doing to global inflation.

In the latest blog post on the IMF site entitled How Soaring Shipping Costs Raise Prices Around the World, IMF economists note the cost of shipping a container on the world’s transoceanic trade routes has increased seven-fold in the 18 months following March 2020. The analysis predates the war in Ukraine but isn’t isolated from it with IMF officials suggesting the conflict will likely exacerbate global inflation.

Studying data from 143 countries over the past 30 years, the IMF found that shipping costs are an important driver of inflation around the world: when freight rates double, inflation picks up by about 0.7%. Importantly, the effects are persistent, peaking after a year and lasting up to 18 months. “This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022,” the IMF stated.

The IMF study has been published at a time where regulators and politicians, especially in the US, are looking to take action to rein in liner pricing. It has also come out at a time where many analysts are questioning if the container boom has in fact plateaued with all the major box indices in retreat this month and economists suggesting western consumer demand has eased in no small part thanks to the soaring inflation brought about partially by high shipping costs.

Are we heading towards a recession? Has globalization peaked? Is the US dollar’s status as a reserve currency under threat? How much will interest rates have to rise before inflation is tamed?

A brave new world

Wars and other major geopolitical events typically act as catalysts for fundamental shifts in monetary world order. A new framework has been proposed recently: Bretton Woods III. Simply put, it is a hybrid of Bretton Woods I and II, where gold plays a bigger role in our future monetary system, but so do other commodities. The US dollar remains the top reserve currency but loses part of its shine to the renminbi.

The rationale behind it is rather straightforward. In a world of soaring inflation, where currencies run a great risk of depreciation if targeted by sanctions, why hold on to foreign exchange reserves? Alternatively, you could turn to gold. But its lack of liquidity limits gold’s upside. Or you can reduce your foreign exchange reserves and stockpile on commodities instead. Which commodities? Practically all of them. Let’s have a look at which macroeconomic developments will shape commodity demand over the next decade.

Rethinking supply chains

Supply chains have been stretched to the limit for over two years. The pandemic coupled with the war will inevitably alter their long-standing structure.

Firstly, countries will begin to establish back-up suppliers. Overreliance on one single producer can prove fatal. Just think of the strain Europe is facing trying to end its dependence on Russian fossil fuels. What happens if China invades Taiwan, which accounts for over half of global semiconductor output? Events in Ukraine make it extremely risky to ignore such what-if scenarios.

However, change does not necessarily imply reshoring all production nor does it spell the end of globalization. The less costly option is to diversify suppliers. The US Treasury Secretary recently hinted at it coined a new term, “friend-shoring”.

It also means moving away from just-in-time supply chains. For all their efficiency, they can also cause rapid, global domino effects. Ports piling up with containers, overwhelmed trucking companies and huge backlogs of orders at factories are direct results of the collapse of just-in-time logistics.

This will mark a transition to just-in-case logistics as discussed above. But production and transportation of raw commodities and finished goods will become less efficient as more companies increasingly rely on less streamlined networks. Such a shift requires the upgrade or development of new production lines, building more ports and storage facilities. Meanwhile, inefficiencies emerge leading to longer delivery times.

Increased military spending

In the wake of the conflict in Ukraine, many countries have pledged to boost their military budgets.

This will effectively generate greater steel demand to build weapons while further reducing yard availability. Evidence of this has already surfaced at certain Chinese yards where the state is said to have placed numerous navy ship orders.

Do unincreased military budgets equal lower economic growth? Not by definition. The academic argument of guns vs butter may apply to poorer countries. However, in the developed world even a modest 10% increase in government-financed R&D can push R&D in the private sector another 5% higher and boost employment. The rearmament race is being led by developed countries, namely the U.S., Germany & other NATO members recommitting to hit NATO guidelines in the coming years. If arming up succeeds in creating more jobs, it should keep unemployment rates under control. A strong labour market has taken centre stage in the argument against an impending recession in 2023.

Commodity stockpiling

The world is currently short of nearly all commodities. Replenishing inventories is a challenging undertaking, one that cannot happen overnight due to logistical bottlenecks and spiraling prices. Nevertheless, restocking must happen. A decade ago, the world was all about efficiency. Nowadays, the new buzz word is resilience, which can be roughly translated into holding abundant inventories.

The current crisis is a commodity crisis. That is why central banks’ tools cannot be particularly effective. Especially when it is their own countries imposing sanctions.

The solution may lie in China. The PBoC is not deterred by sanctions and has incentives to reduce its massive US dollar reserves. China could turn to gold. However, there are plenty of cheap available commodities that most countries refuse to touch. Why not stock up?

Trade dislocations of such an extent naturally boost shipping demand. Even more so since there is no inland way of transporting coal, grains or oil from the Baltic and the Black Sea to the Pacific Coast.

China has largely refrained from an extensive buying spree so far, unlike India. Renewed lockdowns have weighed heavily on consumption and activity, while Beijing attempts to maintain a seemingly neutral stance in international diplomacy over Ukraine. But sooner or later, China is likely to ramp up purchases of steeply discounted Russian commodities. In that case, more ships will be needed.

More ships are needed

The dry bulk market is already tight. Only 7.8% of the fleet is currently on order, hovering near 20-year lows. Tankers have been struggling with tonnage oversupply in the past few years, but things may be about to change if tonne-mile demand gets a boost. Bear in mind that the current crude tanker orderbook does not meet fleet replacement needs. Meanwhile, the number of product tankers to be delivered in the coming years is roughly at par with the overaged units facing more immediate scrapping pressure.

The newbuilding market cannot come to the rescue. Yards’ forward cover extends well into 2025. They are not seeking to expand their capacity while soaring costs (from steel to labour and electricity) sustain prices near 2006-09 average levels. Add higher interest rates to the mix and a substantial influx of newbuilt tonnage moves further away.

If commodity and in turn shipping demand proves to be as firm as we laid out above in the coming years, then second-hand ship values should remain elevated despite any short-lived fluctuations.

On top of strong demand & tight supply fundamentals, the upcoming IMO regulations coupled with increased bunkering costs are likely to render slow steaming the main industry practice. Reduced sailing speeds at a time when more tonnage capacity will be required should be well-supportive of the freight market and second-hand values as a result.

The inflation monster

Following the pandemic, inflation surged to 40-year highs as quantitative easing dragged demand disproportionately higher compared to supply. Central banks cannot adjust the supply side of the equation. As such, they resort to policy tightening to bring demand down by hiking interest rates.

We are not going to debate whether this is the correct course of action. Neither are we going to argue over the predictive power of an inverted yield curve and whether it signals caution or recession. Instead, we would rather highlight that nowadays shipping might be more resilient to higher interest rates as opposed to previous economic downturns.

Government-driven demand

This time, it is not the private sector driving borrowing and spending demand. Supply chains are in dire need of restructuring, but the private sector will take a back seat. Instead, governments will be the major driver of credit demand going forward. And this kind of demand is not as sensitive to interest rate hikes. Firstly, as ensuring food and energy security, replenishing depleted inventories, developing net-zero transition projects and arming up, all must materialize. But also because central banks can step in as and when needed to facilitate their governments.

The shipping sector is no longer overleveraged

What is also different this time around is that shipping is not an overleveraged industry anymore. Its positive outlook, for certain segments more than others, has transformed shipping to a sector where sustainable investment opportunities can present themselves. Banks have taken notice and become more active after having downsized their books since 2010.

Plus, many owners sit on a bunch of liquidity following several lucrative quarters for the dry bulk and containership markets. Even tanker owners with well-diversified fleets have managed to fare well despite two years of dismal tanker earnings.

This means shipowners can generally afford to invest more equity. With banks back in the game offering more competitive LTV ratios than leasing companies, more diverse financing options could come up. Serious cash balance discipline is required. However, it is possible to operate successfully despite inflated costs.

Conclusion

While it is still early days, we are looking at structural, high-level developments that require a long period of time to unravel. When they do, we are likely to embark on a very commodity-intensive decade. Strong shipping demand coinciding with longer distances being travelled at reduced speeds and limited yard capacity might prove we are indeed short of ships.

While we are seemingly moving towards a higher CAPEX and OPEX environment, the floor for both freight rates and asset values will also be raised.

China has removed import tariffs on various coal grades as part of its efforts to maintain adequate supplies amid global disruption caused by the Russia-Ukraine conflict, according to a government document seen by S&P Global Commodity Insights April 28. The tax cut will be effective from May 1, 2022, till March 31, 2023, the document read. The tariff has been reduced to zero from 3% earlier for unformed anthracite, coking coal, unformed lignite, and briquette lignite, according to the document. Tariffs for other bituminous coal, other unbridged coal and similar solid fuels made from coal have been reduced to zero as well from 6%, 5% and 5%, respectively. “I think this is a bold move, mainly to secure more coal from Russia which is at decent discounts. But as far as prices are concerned, they will likely remain high given the volatility in the markets across the world,” an India-based trader said.

The Chinese government’s decision to slash import tariffs comes amid an upheaval in global coal trade after Russia invaded Ukraine in February, following which the European Union and Japan imposed a ban on Russian coal in April. This has led to a surge in coal prices of other origins such as Australia, Indonesia, the US, South Africa, and Columbia due to additional demand from the EU. “The document says the rule is about HS codes, so it is applicable to all origins,” a South Korea-based source said. “This should help Russian coal demand more than other origins because it is already at a discount to other origins.”

Some market participants said the move may weigh on domestic coal prices as imported coal would become cheaper. Chinese demand for imported coal had weakened over the last few weeks as power consumption fell amid pandemic-related lockdowns. China’s government had also imposed a price cap on domestic 5,500 kcal/kg NAR coal price at Yuan 550-770/mt, which is to be implemented from May 1. Traders anticipated that domestic coal prices would fall and had refrained from purchasing in the seaborne coal market. “The removal of tariff should ideally boost imports, but since domestic production is also robust, and with COVID-19 restrictions, we will have to wait and see how this impacts the market,” an Indonesia-based trader said. The domestic 5,500 kcal/kg NAR price was around Yuan 1,100-Yuan 1,200/mt on April 27, according to market sources.

In the metallurgical coal market, the outlook was mixed, with some expecting limited impact given the current wide domestic-seaborne spread at $50.06/mt April 27, while others said the cost savings from the removal of import tariff would not be sufficient to entice more buying interest in the near term. Some sources said that the seaborne sellers might be able to offer at a higher level with the removal of the tariff, adding that this might improve liquidity of non-Australian coking coals into China.

Japan’s Ocean Network Express (ONE) has reported another year of record profits. The world’s sixth-largest liner operator bagged a profit of $16.75bn for the financial year to the end of March. That is more than four times higher than the previous year’s profit of $3.4bn. The Singapore-based carrier attributed the rise to the continued high spot market due to tight supply and demand. “Financials were consistently ahead of forecast over the entire year, and this was the third year of consecutive profitability,” said ONE chief executive Jeremy Nixon.

However, it remained “extremely difficult” to announce a reasonable business forecast for the coming financial year which has yet to be finalized, the company said. “The outlook for the rest of 2022, however, remains cautious as there are still many trading uncertainties ahead in addition to further expected economic headwinds,” Nixon said. The company has used the profit to build back up its balance sheet and cash reserves to its highest level since its operational launch back in April 2018. Ongoing trade developments and geopolitical events are still creating operational bottlenecks in the supply chain, Nixon said. These resulted from Covid-related lockdowns in China, sanctions on Russia, and labour contract talks on the US West Coast. “All these factors are resulting in ongoing industry delay to vessels and increasing schedule voiding and port omissions,” Nixon said.

Strong cargo demand this year saw spot freight rates remain at higher-than-expected levels, despite the impact of seasonal factors including Chinese Lunar Year. Long-term contracts were also renewed at higher levels. On the supply side, port and inland congestion in the US West Coast improved slightly. However, turmoil remains within the entire global supply chain, the carrier said. That lifted profits to $5.1bn in the three months to the end of March.

ONE operations in Ukraine and Russia were significantly impacted due to the ongoing hostilities. This included significant congestion in the Northern European hub ports due to sanctions on Russian way port cargo. “We have stopped all bookings via the Baltic and Black Sea gateways to Ukraine and Russia, whilst our Far East Russia services have been very significantly cut back due to the international sanctions,” Nixon said. Russia and Ukraine account for less than 1% of ONE’s global volumes. But supply chains have been temporarily impacted due to sudden changes in their local production and sourcing requirements. “We have also witnessed a significant adverse impact on global energy prices, including major increases in bunker fuel costs. Vessel charter hire costs remain at unprecedented high levels,” Nixon said.

In March, ONE outlined plans to invest $20bn in ships, terminals, and equipment over the next decade. The move is designed to wean the carrier off a reliance on vessels provided by its shareholders, K Line, NYK and Mitsui OSK Lines. Revenues doubled to $30bn in the full financial year. Liftings on Asia-North America eastbound were lower due to blank sailings caused by port congestion and vessel delays. However, a 100% vessel utilization rate was maintained due to a strong cargo demand.

Germany’s Hapag-Lloyd has unveiled a huge improvement in its profit expectations in 2022. The Hamburg liner operator expects to deliver Ebitda in the region of $14.5bn to $16.5bn this year. That is $2.5bn above earlier projections revealed in March, when Hapag-Lloyd forecast Ebitda in the region of $12bn to $14bn. The world’s fifth-largest liner company made the forecast after preliminary earnings for the first and second quarters exceeded expectations. Ebit this year is forecast at between $12.5 and $14.5bn on the back of soaring freight rates.

The revised projection comes on the back of an 80% rise in average freight rates in the first quarter this year. This lifted Ebitda to $5.3bn for the period from January to March, compared with $1.6bn in the same period last year. Transport volumes of around 3m teu were in line with the previous year.

Hapag-Lloyd’s decision to project an earnings forecast contrasts with its THE Alliance partner Ocean Network Express (ONE). ONE on Thursday reported record profit of $16.75bn for the financial year, which closes at the end of March. But the Japanese-controlled line refrained from making any projection on earnings forecast. The company deemed it “extremely difficult” to announce a reasonable business forecast for the coming financial year.

Hapag-Lloyd, in contrast, has been bolder in its predictions. “Based on current business performance, the second quarter should also exceed previous expectations,” the German line said. “In view of the ongoing Covid-19 pandemic and the war in Ukraine, the forecast is subject to considerable uncertainty.” Final figures for the first quarter of 2022 will be published on 12 May.

In March, the carrier is predicting a cooler market from the second half of this year, after logging huge earnings for 2021. The company expected momentum to remain at a very high level in the first six months of 2022. Beyond that, the owner anticipates that the strained situation in global supply chains will ease, which should lead to the beginning of a “normalization of earnings”.

The 253 ships benefited from significantly improved freight rates resulting from very strong demand for goods exported from Asia. Chief executive Rolf Habben Jansen has however warned of possible “curveballs” thrown at the liner sector that could be difficult to foresee. The average freight rate for the year reached $2,003 per teu in 2021, compared to $1,115 in 2020. Transport volumes were on a par with the prior-year level at 11.9m teu due to the strained supply chains.