EastGate Report: The challenges and opportunities that lie ahead for the dry bulk players
Lukewarm sentiment for Capesizes
The strict Covid-19 containment measures and the stimulus packages China put forward in the wake of the pandemic in order to reignite its economy, seem to have played out well thus far.
The country has showcased a rapid recovery, achieving a 4.9% annualised y/y growth in Q3, which is remarkable considering that back in Q1 when the pandemic broke out, the Asian nation posted a 6.8% contraction.
The infrastructure-intensive stimuli the Chinese government introduced, significantly aided the country’s steel production (up 4.5% y/y in the period January through September) and consequently demand for iron ore and coking coal. In the first ten months of the year, the country imported a total of 975 million tonnes of ore, registering an 11% yearly growth.
But despite the augmented iron ore flow into China during the previous months, the sour relations between China and Australia and the weather factor with rains in Brazil affecting loading operations, have both weighed on Capesize earnings.
The nearly US$35,000/d a few months back, seem to have gone for good as 2020 is concerned, with Capesize average spot TCE rates running at US$12,712 daily (as of November 27th) and with the market not expecting to witness any sharp increase on Cape rates for the rest of the year.
What is also somewhat unusual is that currently Capesizes are earning slightly less than their smaller asset class of Kamsarmaxes.
Grains lending support to Panamaxes
Panamax vessels have consistently benefited from the strong grain demand since the start of the year and the pandemic seems to have amplified that trend.
China, being by far the world’s largest soybean importer, has significantly upped its imports of the oilseed, for reasons ascribed to the Phase One trade agreement with the US, the high profit margins of Brazilian beans, its recovering pig population, as well as food security concerns which bolstered grain demand for restocking of domestic reserves.
In the first three quarters of the year, China’s grain imports rose by a hefty 83% compared to last year.
What this all translates to is that the Panamax bulkers have profited from the longhaul grain trade into China and are expected to continue reaping the grain fruit until year end. The incoming Biden administration, set to take office on January 20th, is also expected to play an important role in the political relationship and cargo flow between the world’s two largest economies, as it is said that the Biden presidency will seek to deflate the trade war rhetoric and warm up the Sino-US diplomatic relations.
Such development would prop up the rally seen in grain trading, as China has broken records by significantly accelerating its agricultural purchases and if incentivised, would probably continue doing so.
That being said, recent reports have arisen suggesting that Chinese crushers are looking to cancel some US soy orders for delivery in December and January, as processing margins have turned negative. The exact quantities of these cancellations, if indeed materialise, is still unclear and it remains to be seen to which extent they will affect the spot freight market.
For the moment, Kamsarmaxes are running at US$12,863/d on average (as of November 27th), which deviates from the seasonal pattern of vessels enjoying their highest earnings of the year when sailing in the final quarter. For at least a third consecutive year, Q4 rates so far have been running below the rates achieved in Q3.
Mixed picture for coal
Geopolitics act drastically in altering cargo flows in the Pacific region.
The recent escalation of political tensions between Beijing and Canberra, which led to an unofficial ban on Australian coal entering China put in force in early November, has essentially meant that all vessels loaded with Australian coal approaching Chinese ports (some 65 currently), are now anchored off the Chinese coast, with some stranded there for months.
We would expect that this development will trigger a shift in cargo flows, with Australian shippers diverting their cargoes to other countries (mainly India and Vietnam), but realistically speaking, the Chinese ban could very well mean reduced production and less cargo transported from Down Under.
On the other hand, the prolonged delays off the Chinese ports ships loaded with Australian coal have been facing, could trigger tighter tonnage supply in the region, which could consequently push freight rates upward in the short term.
Furthermore, headlines that China recently inked a US$1.5 billion worth of thermal coal deal with Indonesia – or in other words about 200 million tonnes of Indonesian coal expected to reach the Asian behemoth within 2021 – is set to increase further the activity in the Indonesia-China route and has rekindled hopes for a rise in seaborne coal demand ahead of a heavy winter.
Low fleet growth and healthy demand to dominate 2021
While the highly uncertain Covid-19 circumstance requires us to tread carefully, there are indeed some bright signs one can find to carry us all into next year.
Despite the indeed heavy newbuilding deliveries of 2020 (the highest since 2016) and some expected to carry over to the first half of next year, the dry bulk orderbook remains historically low (in fact, the lowest since the millennium) and gives ground to a potential reversal in dynamics.
Given the small fleet growth projections for 2021 (a mere 2% of capacity increase), minimal growth in demand is required so that rates become positively affected. Moody’s foresees the dry bulk demand to grow by 3%-5% in 2021, which, if realised, will indeed signal a market recovery.
Assuming China’s post-covid economic rebound maintains its fast pace and since the seaborne dry bulk market is indeed greatly China-centric, demand for the key dry commodities will likely keep up.
Brazilian miner Vale has put forward plans to up its iron ore production to satisfy China’s insatiable demand for the alloy and if so happens, the increase in tonne-mile demand could prompt better rates for the larger carriers.
On top of that, the country’s increasing grain needs for its feed industry remain a main driver for the Panamax freight rates.
Brazil is expected to achieve a record grain output in the 2020/21 harvest season, despite the delays in planting the new crop, and forecasts its soy exports next year to reach 85 million tonnes (up 2.8% y/y).
Coal, however, turns out to be a more complicated subject; since China has for the moment turned away from Australia, the country is seeking alternative suppliers, mainly in Indonesia and Mongolia. With cargo transportation from the latter being facilitated through land, the new coal landscape could have a negative impact on seaborne volumes in the long run.
The shorter term picture is, however, somewhat different with Mongolian cargo flow to have been disrupted due to a surge in Covid-19 cases in the country and it is apparent that Indonesia, with the new coal pact with China, is attempting to increase its share of Chinese imports and likely to boost the seaborne coal volumes in the coming months.
Further, we could see a scenario where China would attempt to fill the coal vacuum by sourcing the dry fuel from regions further away, like the US and Canada, thus increasing the tonne-mile demand.
A global health crisis, spats among key trading partners, political tensions awaiting direction, supply disruptions, all create a tumultuous environment which may, however, generate opportunities going forward.
(Source: EastGate Research)
Sea News Feature, November 27
