Oslo-listed Western Bulk is expecting a record first quarter result in markets that have stayed volatile. The company is forecasting net profit of between $18m and $20m to 31 March. The supramax operator explained it had used “continued high market volatility, both in respect of total market levels and relative levels between the Pacific and Atlantic basins”. This meant the start to the year had been very good, Western Bulk said. “The company has also managed to limit negative impacts from the Russian invasion of Ukraine,” it added.

The Baltic Exchange’s supramax index started the year at about $24,000 per day, before falling close to 30% and bottoming out at about $17,000 in early February. Since then, the market has increased by more than 90% to current levels of about $33,000, the firm said. “The spreads between the Atlantic and Pacific basins have also seen significant volatility which has benefited Western Bulk,” the operator added.

The company is expecting this volatility to reduce somewhat over the rest of the year. From the second quarter, profit should be lower than in the first three months, it said. Western Bulk logged $72.1m in net profit for the second half of 2021, more than eleven times the $6.1m it booked during the same period in 2020.

A shake-up in the corporate culture and trading patterns helped the group finish strongly, allowing it to kick-start dividend payments, TradeWinds reported. The board is proposing a pay-out for 2021 of $65m. The company has said it intends to implement a quarterly dividend policy of a minimum 80% of earnings after the first quarter of 2022.

The invasion of Ukraine could reduce the price spread between high and low-sulphur fuel oils, impacting the economics of scrubbers, says a top shipbroker. Russia is pivotal to the global HSFO market with almost 90% of its approximately 800,000 barrels per day (bpd) of fuel exports being HSFO. “Therefore, a major loss in HSFO supplies will raise its price, and all else being equal, narrow the scrubber spread,” said Anoop Singh, head of tanker research at Braemar ACM Shipbroking. “Already, Russian fuel oil exports have dropped to the lowest since 2019 in the past two weeks. Meanwhile, its gasoil and crude exports are largely unchanged. Lower fuel oil exports from Russia have contributed to the scrubber spread falling some 20% from its mid-month peak.”

Singh anticipates that a bigger squeeze on the scrubber spread looms with a persistent increase in HSFO prices likely to press that spread over the rest of this year materially. Russian HSFO exports are likely to fall further once the country’s fuel oil production drops, with the International Energy Agency (IEA) expecting refinery runs to decline 1.5m bpd year on year for April to December 2022 period. Russian fuel oil yields averaged 15% in 2021, which will mean a 225,000-bpd loss in fuel oil supplies, most of that being HSFO production, according to Singh. In contrast, HSFO demand is likely to increase amid tightening supplies seasonally.

Middle Eastern HSFO demand for power generation over the summer picks up from April which will be followed by a likely ramp-up in South Asia HSFO purchases. “Relatively higher prices of gas/LNG and crude suggest a larger switch into HSFO this year is on the cards,” said Singh. There are few accessible alternatives to lost Russian fuel oil. One widely considered option is a potential increase in Iranian HSFO supplies if US sanctions on Iran are lifted. “In our view, that may paradoxically increase HSFO prices. That is because most Iranian HSFO volumes are already in the market,” said Singh. “Traders have mastered hiding the origins of suspect barrels and blending them into marine bunkers.” Braemar ACM estimates that between 150,000 bpd to 200,000 bpd of heavily discounted fuel oil has continued to leave Iran over the past year. That compares with pre-sanctions exports of about 250,000 bpd. “Once sanctions are lifted, these barrels will trade at market prices and offset a modest impact of a few additional barrels,” said Singh. One other option is the 615,000 bpd Al Zour refinery in Kuwait, which was initially scheduled for commissioning last month. “That plant can temporarily add more than 200,000 bpd of HSFO to the market before it starts secondary conversion and desulphurizing units,” said Singh. “At design operations, however, the refinery will produce LSFO fuels instead.”

French shipbroker Barry Rogliano Salles (BRS) said the bunker spread is approaching a record $250 per tonne in Rotterdam. A scrubber equipped VLCC can earn $4,000 today, but a ship without a scrubber is losing $8,500 per day, the company added. “Current futures curves suggest that the VLSFO/380 Cst spread will halve over the next year,” BRS said. But the broker is not so sure. The Paris shop believes both gasoil and fuel oil prices should remain supported by tight product markets for as long as the Ukrainian conflict persists. “On balance, we believe that if China starts exporting ultra-low sulphur diesel/gasoil again, this should loosen the global gasoil market and exert downward pressure on prices,” BRS said. “On the other hand, we see no such potential incremental supply source for fuel oil, which suggests higher 380 Cst prices since the majority of Russian fuel oil exports are high sulphur,” the broker added. BRS concluded that, although the spread could fall back to below $150, analysis implies that $120 looks unlikely while the war continues to rage.

The dry bulk market should maintain healthy rates through the second quarter amid trade disruptions because of Russia’s invasion of Ukraine, as well as continued congestion. While supply growth is of little concern, with few planned additions to the fleet this year and an expected rise in removals activity, given high demolition prices, the more worrying aspect of the market is how the war in Ukraine will affect demand, not just in the short term. “The market will strengthen further… in line with normal seasonal demand developments, but the market may not improve as it would have done without the war in Ukraine,” said BIMCO’s chief shipping analyst Niels Rasmussen. “Also, as the year goes on, we may begin to see further weakening compared to previous expectations.” The main concern for the Danish shipping association is the impact of the war on the global economy, combined with demand destruction due to commodity prices, which remain volatile, though significantly higher than before the invasion. “Both of these factors can reduce volume demand, though such a reduction could be countered by longer distances sailed,” Mr Rasmussen said.

While some analysts and owners are more bullish, focusing on the increased employment time for bulkers, mainly affecting the sub-capesize fleet, others expect the lost volumes from the Black Sea region to outweigh any potential longer sailing distances amid the trade flow shake-up. Ukrainian ports were forced to shut when Russia launched its attack towards the end of February, putting mostly grain exports at risk. Some bulkers turned back, while others have been stuck there, as they were in the middle of loading cargoes. Many owners are avoiding the war risk area, due to hefty insurance premiums and safety fears for vessels and their crews, after a handful of ships were shelled. They are also self-sanctioning, preferring not to conduct new business with Russia, given the unprovoked attack on Ukraine, though they are still committed to existing contracts. There is also always the threat of tightening official sanctions on Russian companies and individuals, which could be extended to cargoes if the war is prolonged, and owners and operators do not want to be embroiled in such an outcome. However, there are pockets of willing owners and operators who will be paid premiums for calling in the area, and there was still activity at Russia’s Black Sea port of Novorossiysk at the time of writing in the final week of March. Even so, the threat to volumes is clear. Russia is the third-largest exporter of coal, shipping about 177 MMT in 2021, according to Banchero Costa. Almost half was sent from the Far Eastern ports to destinations in Asia, 30% moved to Europe from the Baltic, and just over 10% was shipped from Black Sea ports. The overall benefit to annual tonne-miles for a reshaping of Russian coal flows is in the region of 80bn, according to Arrow Shipbroking research, while iron ore from Ukraine will be hit by some 211bn tonne-miles. The overall effect is a negative 131bn tonne-miles.

Already there has been more coal moving to Europe from Indonesia and Australia, adding to tonne-miles, as the European Union curtails its dependence on Russian energy. Other alternative suppliers include Colombia and South Africa, but questions remain as to whether these additional volumes can be maintained. The picture is more worrying for grains. Russia and Ukraine account for slightly under one third of global wheat exports, with few alternatives to plug any shortfalls. While some volumes are being sent by rail from Ukraine to ports in Romania and Bulgaria — pegged at about 600K tons, or a fraction of the total — a significant decline is expected. Some grain analysts estimate the drop to be in the region of 20-25 MMT in the coming months. Ukraine also accounts for 13% of the global corn market, while sunflower oils and seeds represent 36% of global market share. For wheat, Russia’s share is 18%, at about 31 MMT, while for sunflower-related trades it is 17%, and for barley, 12%. Most of the shipments are short-haul to Turkey and countries in North Africa and the Middle East, moving on smaller-sized bulk carriers. Already, there are reports that Russia has banned exports of wheat, rye, barley, and corn, as well as fertilizer, threatening longer-term plantings and crop quality at a time when global reserves have been falling. Given the high wheat prices, India is said to be ramping up exports, targeted at 7 MMT. Australia, the Americas, and France and Germany could also add volumes to the seaborne market, although they may fall short, fueling concerns about food inflation leading to riots in the most dependent countries.

Steel is another bulk commodity that will be affected by the conflict, though to a lesser extent in terms of volume. In the past year, Black Sea steel exports were predominantly moved to the Mediterranean, Brazil, and the US. Replacement volumes could come from Asia, which would help supramaxes the most. Increased congestion, because of new coronavirus cases shutting ports in China, as well as logjams in Europe, is also feeding into the higher rates environment. At the time of writing, handysize and supramax spot rates had strengthened the most over the past month, followed by panamaxes. They have been outpacing capesizes, which are the least exposed to the Black Sea region.

The global seaborne map of capesize trades is set for one of its largest shifts in the wake of the signing finally of a multi-billion-dollar iron ore mining deal in West Africa. Guinea’s ruling junta has penned a $15bn framework agreement with mining giant Rio Tinto and a Singapore-led Winning consortium on the exploitation of the massive Simandou iron ore deposits. The 35-year deal is for blocks 1 and 2 attributed to the Winning Consortium, which includes Singapore’s Winning Shipping, Guinean mining logistics firm United Mining Supply (UMS), Chinese aluminum producer Shandong Weiqiao and Guinea’s government, and blocks 3 and 4 to Rio Tinto.

The investment primarily covers developing a 670 km railway from the Simandou site to a new deep-water port at Moribayah. Guinea’s mines and geology minister, Moussa Magassouba, stated the government had negotiated and gained a 15% share in the rail, port, and mines, and that once completed, the new infrastructure would become state property. “This framework agreement will allow the joint development of this project, a huge project. Everyone’s effort will allow for the accelerating of the process and resumption of work in better conditions so that this project reaches maturity and can bring more development and wealth to Guinea,” said Fadi Wazni of Winning Consortium.

Géraud Moussarie, director-general of Rio Tinto Simfer, added: “We think that co-development is a very good model of development project, partly because of the big funds, great capital gathered to bring the expertise of everyone. And we really look forward to continuing to work together with our new partners and the State of Guinea.”

Simandou deposits have been estimated at 2.4 BMT of high-grade ore, much of which is destined for Chinese consumption, but they remain undeveloped due to legal challenges and political unrest.

Commenting via LinkedIn on the deal, Splash columnist Kris Kosmala stated: “China aims to fundamentally solve iron ore shortages and dependence on Australia and Brazil. That’s where Guinea and its Simandou mine comes into play.”

According to Magassouba, the execution of the 670 km of rail and the deep-water port should be carried out by December 2024, while the first commercial production is expected by March 31, 2025. Once fully operational, the project is expected to have a 100 MMT a year iron ore production capacity.

On Sunday China announced Shanghai would enter a staggered lockdown, starting today, marking the biggest city-wide lockdown in the People’s Republic since the Covid outbreak began more than two years ago.

For shipping, congestion at the port – already very high – is expected to increase in the coming days, while overseas, terminals in Europe and North America will have to brace for an even larger whiplash effect when the city regains normal productivity – and comes as global supply chains absorb the fallout from a seven-day lockdown in Shenzhen to the south earlier this month.

The authorities have decided to split Shanghai in half using the Huangpu River for the new two-part lockdown. The city recorded 2,631 new asymptomatic cases on Saturday, which accounted for nearly 60% of China’s total new asymptomatic cases that day, plus 47 new cases with symptoms.

Pudong, the eastern part of the city, is in lockdown from today through to Friday as mass testing gets underway, while the western area, Puxi, will lock down between April 1 and 5. Public transport will be suspended as will work at most factories. However, essential workers, including port labour, will be exempt from the stay-at-home order.

Commenting on the ramifications for container shipping, Lars Jensen, CEO of consultancy Vespucci Maritime, stated via LinkedIn: “If this is widespread it will mean demand slow-down in the short term and downwards spot rate pressure, followed by a surge and upwards pressure. Obviously, this disrupts the flow of containerized cargo when truck drivers must pass many Covid tests to do their jobs. And closure of factories this week is not improving a situation that has soured for most of March,” commented Peter Sand, chief analyst at Xeneta, going on to predict a likely further softening in spot rates in the coming weeks.

“Global shippers would prefer more predictable and reliable supply chains to more obstacles and falling rates,” Sand said.

Japanese shipbuilders are seeking significantly higher prices for handysize and ultramax bulk carrier newbuildings, according to local reports. The war in Ukraine has stoked up concerns among the country’s yards that steel and other material prices are set to increase and encouraged them to seek higher prices to protect against future inflationary pressures. Early deliveries for 2024 are commanding a significant premium as dock space is limited.

According to local specialist paper Japan Maritime Daily, Japan’s bulker yards have achieved prices close to $33m for a 38,000-dwt handysize bulk carriers, for early delivery in 2024, and $38m for 68,000-dwt ultramax bulk carrier. Later deliveries in 2025 are priced at lower levels. Such price levels represent a considerable mark up on the current average prices listed by broker Clarksons of $29.5m for a handysize bulk carrier, and $32.5m for a 62,000-dwt bulk carrier.

Although newbuilding negotiations for handysize and ultramax bulkers are underway, actual contracting in the bulk sector has been low over recent months. Clarksons reports an 86% reduction in bulker newbuilding activity so far this year, compared to the levels achieved in 2021.

The Ukraine crisis has also had a major effect on the value of the Japanese Yen against the US Dollar which strongly influences the ability of Japanese bulker yards to compete against their main rivals in China. The Japanese Yen recently devalued to a six-year low of ¥120 to $1 on the currency exchange markets. The immediate impact of the devaluation is that it makes Japanese shipbuilders more competitive in the international export market for ships. It also benefits yards by increasing Yen income for instalments on ships that have already been ordered and are under construction. But the fall in the value of the Yen could also have a longer-term negative impact. It also pushes up the cost of imported materials and equipment and adds to domestic inflation and shipyard’s overall cost burden.

While high dry bulk spot rates can be attributed to demand recovery and inefficiencies, the “strongest “influencer” has been high bunker prices which is slowing ships down, according to Star Bulk Carriers’ president Hamish Norton. That is a positive as “high fuel is great for shrinking supply,” he said, adding that fleet growth could be less than 2% this year. Ships with scrubbers were currently benefitting from a fuel spread in the region of $180-$200 per tonne, he added. Speaking on a Capital Link dry bulk panel, Mr Norton said he was optimistic for the market over the next two to three years. He expects spot rates for capesizes to average $30,000 per day this year, with kamsarmaxes averaging $25,000, and handysizes potentially “going through the roof”.

While other panelists concurred with the views for the larger-sized bulkers, Grindrod Shipping’s chief executive Martyn Wade expects handysizes to average $25,000-$30,000 per day in 2022. That is in line with the bigger ships. Tonne-mile demand growth was pegged at between 4%-7% this year against fleet growth estimates ranging from less than 2% to 2.5%. In the short-term, the situation in Ukraine was a positive for dry bulk shipping, but in the longer-term, it could have a negative impact, said Golden Ocean’s chief executive Ulrik Andersen. He said he was “deeply concerned” about the situation and hoped that the conflict would end soon. The company has little exposure to the area after two of its capesizes turned back when war broke out. On the one hand, the re-allocation of coal with Europe getting more supplies from Australia instead of Russia can survive a prolonged conflict, while on the other hand, grains, although replaceable in the short-term, will see demand destruction over time, he said.

According to Mr Wade, minor bulks demand will be steady through the year. He expects a rise in tonne-miles from the Russia/Ukraine crisis as replacement commodities are sourced from further afield. Steel trades are also looking positive, especially when the US starts its infrastructure investments. Mr Norton expects that strong demand for steel exports from China could be on the cards as Europe limits its imports from Russia.

Meanwhile, iron ore trade could be steady this year, and Brazil’s mining giant Vale would need to double volumes starting in the second quarter in order to meet its full-year guidance of 320 MMT, according to Stamatis Tsantanis, head of capesize owner Seanergy.

Given where spot rates were, the allure of purchasing secondhand assets rather than ordering new ships was discussed. Secondhand ships were a “better investment decision” as it provides options for the next two to three years, said Mr Norton. Looking at the forward curve for 2024-2025, new ships being delivered will enter when the market will not be as high, which does not make a good hedge, he said, adding that there was reason to wait before ordering given also the uncertainty about what type of ships will be needed by 2030. Yards were not keen to take on bulker orders as they preferred to build the more expensive containerships or gas carriers, and owners would struggle to find berths especially for the smaller bulkers, according to Safe Bulkers’ chief executive Polys Hajioannou. He expects to buy the odd secondhand ship here or there this year, although he will steer clear of five-year old kamsarmaxes priced at $40m, he said.

While he does not anticipate an increase in scrapping this year, he does expect many of the older ships to exit the fleet in the middle of the decade as charterers will not want to hire this tonnage with highly priced commodities on board.  

Agricultural analysts warn of food shortages as farmers scale back their usage of fertilizers amid supply disruption stemming from Russia’s invasion of Ukraine. Corn, soy, rice, and wheat yields around the world stand to suffer amid lower yields.

Sanctions on Russia and Belarus target key types of fertilizers. In 2021, both nations accounted for more than 40% of global exports of potash, with Russia supplying 22% global exports of ammonia, 14% of urea and about 14% of monoammonium phosphate (MAP). Further, the heightened gas prices have significantly increased sulphur-based fertilizers production costs.

Farmers in Brazil are applying less fertilizer to their corn fields and are also struggling to secure potash used for soybean production. Some farmers report their soybean harvest might shrink as much as 8% this year. In the US, corn farmers have reacted to the sky rocketing prices similarly as many move to reduce planting acreage and limit application of fertilizer.

Asian buyers have turned to Canada and Israel as many expect China not to lift their fertilizer export restriction. Canadian farmers have in turn begun to bulk buy fertilizers and many believe the issue will remain for the long term , and at least through 2023.

Indonesian exports of coal have reached their second-highest level on record as overseas buyers shift purchases from Russia, according to BIMCO. “From week five to 11 this year Indonesia exported 62.9 MMT of coal, an 11.5% rise compared with the same period last year and only exceeded by 2019 for the highest volumes on record shipped during those weeks,” the shipping association’s chief shipping analyst Niels Rasmussen said in a note.

Indonesia is the world’s largest exporter of thermal coal. China and India are key buyers of Indonesian coal, accounting for 45% and 16% of 2021 volumes, it said. The Indonesian government temporarily banned coal exports in January over concerns of inadequate supply for domestic power plants. This removed around 30% of global coal volumes from the bulk market and left about 150 vessels waiting off the South Kalimantan coal-exporting region. The ban was lifted at the end of January.

“In the short term we expect Indonesian exports to remain strong as buyers look to catch up on delayed shipments,” said Mr Rasmussen. “Unfortunately, however, there are rumors that another export ban many come in April or August.”

Post-invasion bulk carrier vessel sailings from Russia have dropped 72% for the seven-day period until March 16, compared with the week before Ukraine was invaded, Lloyd’s List Intelligence data shows. Shipments from the Far Eastern Russian coal exporting port of Vostochnyy contracted to eight, compared with 18 over that period.

Slowing down

As global supply chains continue to be disrupted and commodity prices soar, we look at how the steel market is performing and its effect on freight. 

According to the latest figures from the World Steel Association, global crude steel production totaled 142.7 MMT in February, declining by 5.7% YoY. Although this can largely be attributed to the decline in Chinese production, which fell 10.0% MoM, output in other main producing regions has also dropped. Excluding China, global crude steel production totaled 67.7 MMT in February, the lowest level since September 2020. However, seaborne trade in iron ore has continued relatively unaffected, increasing by 0.4% YoY across January-February of this year. On the other hand, coking coal trade has declined by 8.1% YoY due to steep declines in Chinese demand.

While most producers printed yields below those of February last year, India and the US were more positive. Indian crude steel production totaled 10.1 MMT in February, rising by 7.6% YoY, while US production increased by 1.4% YoY to 6.4 MMT.

Seaborne steel trade, however, has not faced similar downside, increasing by 5.2% YoY to 12.1 MMT in February. Overall, the Supramaxes have benefitted from the growth in this trade at the expense of the smaller Handies. Trade has been buoyed by increasing exports out of Brazil, primarily due to increased demand from the US. Steel liftings to the US from Brazil totaled 929K tonnes across January—February, increasing by 32.4% YoY. Japan has also seen growth in steel exports, totaling 1.1 MMT in February, rising by 24.1% YoY. In terms of destination, these cargoes have been more of a mixed bag with the majority heading to Mexico, Thailand, and the US. The transpacific voyage to the US may see further growth in 2022 after the two countries reached a deal to permit most of the Japanese steel to be imported into the US tariff-free.

China

Following our last update on the Chinese steel market in February, when the country’s steel production had modestly bounced back from the sharp declines in Q4 of last year, it has reversed course. Lockdowns in major steel producing regions such as Tangshan in Hebei province have weighed on output while lockdowns elsewhere have caused significant transportation disruptions. As mills struggle to retrieve their raw material orders, it was reported today producers in Tangshan are likely to cut output as a result. Daily discharge rates for iron ore in Chinese ports has declined to 1.8 MMT, the lowest level in the past 12 months as port operations are affected.

Even though crude steel output in the country has declined, this has not hampered demand for seaborne iron ore to the same extent. Chinese iron ore imports totaled 92.2 MMT in February, declining by 1.5% YoY, following a bumper month in January for iron ore imports that amounted to 112.2 MMT. Coking coal, on the other hand, has not been as strong. Chinese metallurgical coal imports in February totaled 1.7 MMT, decreasing by 33.3% YoY, on the back of a steep decline in volumes from the US, which fell by 1.1 MMT.

Indian output strong

As we mentioned above, Indian crude steel production has been strong so far in 2022 and remained above pre-pandemic levels. To support the recovery following the pandemic, the Indian government has implemented several steel-intensive infrastructure spending policies in place which has incentivized the ramp up in production. This also coincides with the country’s aim to produce 300 MMT of steel by 2030. In 2022 the country’s iron ore imports have more than tripled YoY across January-February to 1.1 MMT as heavy rainfall hindered domestic production.

To diversify their purchasing, Indian mills have sought after coking coal from other sources, such as Russia. In 2021, India imported 4.0 MMT of coking coal from Russia and although India has not sanctioned Russia so far, some major Indian buyers have self-sanctioned Russian product and will have to purchase from elsewhere. Given their already strong trade relationship, it is likely most substituted volumes will come from Australia, resulting in some longer-haul voyages.

Europe to alter imports

European crude steel production totaled 11.7 MMT in February, declining by 2.5% YoY as output continues to slow following a strong 2021. European mills have faced higher costs due to rising carbon prices through the bloc’s emissions trading scheme. So far, this is the only region which includes the ferrous industry under such a system. This has compounded pressure on steel producers in Europe which already face abnormally high energy costs.

The current war in Ukraine has led to the bloc imposing a ban on steel imports from Russia and Belarus, from which it imported on average 467K tonnes per month in the 12 months before the invasion. Russian steel accounted for 25% of European steel imports in 2021, coming to 5.6 MMT. Europe will look elsewhere for these volumes; particularly as domestic producers continue at reduced capacity. As a result, we may see increased volumes from China which more than doubled YoY in 2021 to 1.5 MMT.

Flows in 2022 have further accelerated with 516K tonnes shipped so far, set to be the highest volume for this trade in Q1 since 2016. As easing domestic demand in China persists, there will be more opportunity to export out of the country. To protect domestic producers, the EU has a quota system in place, with different allocations set for exporters around the world. While the ban is in place, Russia’s quota will be redistributed across other steelmaking countries, with Turkey and India set to be allocated additional volumes. While existing contracts have a 3-month transition period to be completed, thereafter it will be difficult for these volumes to head elsewhere as Russia’s main trade partners following the conflict have been other large steel-producing countries, such as Turkey and China.