Increasing demand for the carriage of dry bulk overtakes shipping supply in dry markets causing, as any armchair economist could predict, rising freight rates. But it’s not a super-surge by any means...
Only a few brave souls would have predicted a late-mid-year dry bulk rally – a time of year when dry bulk rates are historically weaker.
But here we are.
“The start of the year has brought some much-appreciated relief to owners’ and operators’ bottom lines following years of lower earnings in the dry bulk industry,” says Peter Sand, an internationally renowned analyst with global shipowner body, BIMCO.
The Baltic Dry Index has hit a year-to-date high. And, not only that, but the dry bulk market has also apparently reached highs not seen in over a decade.
The market surge appears to be driven by the capesize sector, which is being supported by the iron ore and coal trades. Capesize spot rates have hit USD$50k a day. One time charter was even fixed at US$74,850 for a capesize on the Europe / Asia run.
The Supramax, Panamax, and Handies sectors being supported by minerals and by agri-exports.
Demand is up while port congestion squashes supply
So, why? Well, the usual suspects are the driving forces of the market rally. Demand is up and port congestion is taking a chunk of supply away, which provides for upward price pressure.
There has been an uptick in the volumes of iron ore shipped. Indeed, the Pilbara Ports Authority have been talking of a record-breaking year in 2020-21 with an annual throughput of 724.7 million tonnes. The Authority handled 63.2 million tonnes in June and another 59.0 million tonnes in July.
Another major factor boosting demand for dry bulk shipping is the return of the Brazilians. Brazil-China iron ore volumes were low for some time following the Brumadinho dam disaster. The dam collapsed releasing a river of toxic sludge created as a by-product of iron ore mining. Hundreds of people died in the tragedy. Following the disaster, Brazilian iron ore shipments declined.
However, this year exports of iron ore from Brazil to China are about 12% up by volume, according to various broker reports. Shipbrokers at Intermodal have described the capesize marked as having “rallied” which it attributed as being partly due to weekly iron ore volumes from Brazil “rebounding”.
Dry bulk shipping capacity is also being absorbed by the coal trades, “which continue to draw ships into rather unusual loading ports… which adds uncertainty for charterers regarding future vessel availability and thus aiding freight rates,” dry bulk experts at Breakwave Advisors report. Meanwhile, international ship owner body, BIMCO, reports that the volume of shipped coal in the first half of the year grew modestly by about 3.6%.
And now we can turn to port congestion. Ships are being held up at ports in China because of local COVID restrictions. Earlier this month several mariners have tested positive for COVID, which has prompted more harsh restrictions on movements. A rules-induced shortage of pilots and 14-day quarantine periods appear to be to blame. Some Chinese ports are also apparently requiring a 21 day quarantine. According to shipbroker and general media reports, about 15.9% of global dry bulk shipping capacity – that’s hundreds of ships with, collectively millions of tonnes of deadweight capacity – is idled in a queue.
Rates for vessels in the smaller category sizes, such as Supramax and Panamax, are also on the rise for much the same reasons, supply, demand, and congestion.
Agri-volumes are providing support
The dry bulk shipping market rates have also been buoyed by agri-export volumes. Ukrainian wheat exports have surged, with about 1.11 million tonnes shipped in the week ending Friday 20 August, which is double the volume shipped the weak before. Ukrainian farmers have apparently hit a record-high output of 32 million tonnes and have strong and large export commitments for the coming months. Overall shipments for the Ukrainian wheat season so far are more than 6.8 million tonnes, about 10% higher than this time las year, reports D&F Shipping Market Analysts.
The Baltic Exchange describes “healthy grain cargoes” both from the Black Sea region. It adds that there is healthy demand from the Pacific regions together with reports of grain-houses securing tonnage from the Pacific to the U.S Gulf and east coast south America loading.
Brazil’s corn harvest is accelerating with about 70% of the crop harvested in the centre-south, D&F reports, and the country is forecast to increase its production by 35% on last year’s volumes to stand at about 118 million tonnes. Export volumes are forecast to hit up to about 43 million tonnes, up by about 86% from 2020-2021, D&F reports.
Meanwhile, weekly sales of U.S. soybeans have increased by close to a million tonnes to stand at about 2.14 million tonnes to the seven days to Thursday 12 August. China is the largest buyer.
Whether or not you think freight rates are ‘high’ or not depends upon your perspective. Sure, average dry bulk earnings have more than doubled in the first seven months of this year when compared to the same time last year, or even the year before… and for quite a few years before that. But they’re almost as nothing compared to the earnings seen in 2007 and 2008.
International shipowner body, BIMCO, reports that in the first seven months of this year, capesize rates hit an average of about US$24,970 a day but, back in 2008, those average earnings were about US$147,547 a day.
“Commodity prices have staged a comeback and are hovering around or above 2007 and 2008 levels. This has fuelled talk of a commodity super cycle. However, while dry bulk freight rates and ship values are currently high compared to the past 10 years, they are very far from earnings seen during 2007-2008 and there is little to suggest that they are heading that way,” says Peter Sand, BIMCO’s Chief Shipping Analyst.
It’s a tale of two predictions for the remainder of the year. The consensus appears to be that the dry bulk markets will be elevated / firm on the back of expected demand growth for shipping. However, there is concern at Chinese government policy, which appears to be trying to rein-in its steel-making industry. “For the rest of 2021, we expect demand growth for dry bulk shipping to total almost 3x the growth in net new supply… utilization is heading to new multi-year highs that have the potential to push shipping rates much higher. We anticipate volatility to remain elevated, while we sense that government policy decisions, especially as it relates to China’s attempt to reduce carbon emissions caused by steelmaking, will be major drivers for the direction of future demand for dry bulk shipping,” Breakwave Advisors conclude.