The Breakwave Dry Bulk Shipping ETF (BDRY) ended this week up by 19%.  Sentiment has now turned (arguably one week late) following the change in China that commenced two weeks ago.   As we have been stressing in our work in recent weeks, China is during its third covid surge, but this one remains quite different as lockdowns are being lifted even as cases have been rising.  Also notable with BDRY is that volume reached 793,000 shares on Thursday.  This has marked the largest volume seen since November 15th.

The Capes

We’ve seen a war, soaring inflation and an unpredictable China. But what has been a considerably volatile year for the Capesize market, is soon coming to an end.

From the beginning

Following a year in which the Baltic Capesize Index reached its highest level since 2009, 2022 has unfortunately not kept the party going. It was a lackluster start to the year as the Chinese holidays approached and the historic levels of Chinese congestion embarked on a sharp decline, falling from 19.7 MDWT to just 5.1 MDWT in little over a month. This coupled with the removal of the 14-day minimum ballast requirement in West Australia later in the year meant the Capesize market has been operating much more efficiently, weighing on freight rates. Though we got a brief spike in Chinese queues in September due to Typhoon Moifa this wasn’t close to the peaks of the start of the year. The C5 roundtrip has now shed approximately 7 days compared to what it was a year ago, despite the fleet operating at considerably slower speeds.

As the congestion in China eased, the world was met with the alarming news of a war starting in Ukraine. The EU immediately started implementing waves of economic and trade sanctions on Russia, which saw global seaborne coal flows (among others) drastically change. With the full EU import ban on Russian coal not taking effect until mid-August, most European energy producers were quick to stockpile Russian coal as gas prices in Europe soared. Though it was when power stations started looking elsewhere for coal that the Capes saw some benefits. European power stations started importing coal from the US, Colombia, South Africa, and Australia with the long voyages suiting the Capes. As a result, Capesize demand from European coal imports increased by 79.4% YoY across March-November. With the war now in full flow and European coal demand soaring, Q2 was trending towards a return to the good times as locked down Australia and a rainy Brazil re-emerged following a disappointing Q1. With the issues of Q1 in the rear-view mirror, Capesize iron ore shipments out of Australia and Brazil increased by 8.2% and 18.9% respectively in Q2. Now gaining momentum, the BCI increased by 19.4% in April closing at $18,460/day. In May, India surfaced as the X-factor that would drive the market to its peak of the year in May. An extreme heatwave saw the country’s coal imports from Indonesia hit their highest ever level, with 8.9 MMT lifted on this trade by the Capes in May. As Indonesia started sweeping up Capes sailing from the Far East, resulting in a shrunken ballaster list back to the West. By May 23, the BCI reached its peak at $38,169/day, more than doubling MTD. As the sudden spike in demand dwindled, so did Capesize returns, reversing back $21,516/day by the end of the month. Hitting new quarterly highs in both Q1 and Q2, West African bauxite has continued its rise in importance to the Cape market. Bauxite volumes surged 19.8% YoY in 1H22 to 42 MMT.  However, the inevitable weather ridden Q3 took its toll and thus the West Africa option for ballasters was less fruitful and the Brazilian miners had more vessels to choose from. This was particularly impactful on Capesize returns as the VLOCs started grabbing a greater share of Brazilian iron ore shipments, reaching their highest daily volume of the year by October.

The Macro

Though prices were already on the rise due to a widespread supply-demand imbalance in several dry bulk commodity markets in 2021, the war exacerbated global inflationary pressure. To combat rising prices, central banks have turned hawkish and global economic activity has started to slow. This naturally had effects on steel-intensive industries such as property and infrastructure which was then reflected in declining steel demand and thus production across all global producers, apart from India. So far this year, global steel production has declined 3.7% to 1.6 BMT according to the World Steel Association. October data did, however, provide some encouragement with most major producers showing a MoM improvement. China on the other hand, has not had the burden of mounting inflation but has been during a year-long battle against Covid-19. The country’s zero-Covid policy has waned on its economy and therefore commodity demand, while its property sector has yet to show any meaningful signs of a recovery. The developments of the past couple of weeks have been encouraging as restrictions across several major cities have been relaxed. China has announced a range of stimulus policies to support its property sector, but the results have yet to show. As we discussed in a Big Picture in November, there is inherently a response lag with these policies and thus remain confident the results will start to show next year.

The macroeconomic environment and volatile freight returns this year has driven a cautious approach to newbuild contracting so far this year, as well as the looming environmental regulation set to take effect from the turn of the year. Newbuild prices have remained firm, however, despite the sharp downturn in the market as energy costs and steel plate prices, particularly in Japan, have yet to subside. As a result, just 30 Capes have been ordered so far this year. Slots are said to be almost full up for 2025, and some yards which can build both bulkers and tankers are now unsurprisingly seeing more interest for the latter, which could further extend delivery times. Cape deliveries have also been few and far between, set to match the 10-year lows of 2018 at 51 vessels. Meanwhile, just 12 vessels have been removed resulting in net Capesize fleet growth of 2.2%.

Looking to next year, there remains several uncertainties with regards to new regulation, a Chinese recovery, and a worsening economy in the West. And while the growth outlook for iron ore and coal is limited, we still see the potential for better days ahead.

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.