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BIMCO releases report on the smaller dry bulk segments

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Dry Bulk,

BIMCO reports how while the capesize segment has been massively impacted by the coronavirus, the smaller dry bulk segments are starting to recover towards profitable territory, partly on the back of seasonally higher grain exports from South America. Nonetheless, as the coronavirus continues to spread, the risks are skewed towards the downside.

Capesize remains extremely unprofitable, but what about the rest?

The Baltic Exchange capesize index has recently drawn headlines as it, for the first time ever, went into negative territory. The index is still in negative territory, currently at -372 index points, due to the seasonality, IMO 2020 and the outbreak of the coronavirus. When looking at the capesize earnings, the same picture of unprofitability becomes abundantly clear. On 6 March 2020, average capesize earnings for a non-scrubber fitted ship sits at US$2542/d, deep in loss-making territory.

Yet, as the capesize segment has remained shackled in the doldrums, the smaller dry bulk segments panamax, supramax and handymax has started climbing away from the loss-making freight rates.

Argentina kicks off the year on a strong note

The first quarter of the year typically marks a slow one for the dry bulk market, partly due to the lunar new year celebrations in China and seasonally low agricultural export volumes from South America.

Yet, an unusually strong start to the Argentinian season has partly prompted a pickup in dry bulk demand and somewhat insulated the smaller dry bulk segments from the effect of the coronavirus.

In January, Argentina exported a total of 6.2 million t of grains (defined as soya beans, coarse grain and wheat), where wheat accounted for 3.8 million t and 2.4 million t came in the shape of coarse grains. This uptick in exports marks a 34% increase in exports compared to January 2019.

Brazilian grain exports down 11%

Brazil claimed the crown from the US – which has held the top spot for over 20 years – as the largest seaborne agricultural exporter in 2019. However, Brazil has kicked off the new year on a slow note with low export volumes of grains. In February, 5 million t of soya beans were exported from Brazil, of which more than two thirds went directly to China. Accumulated exports for the two months of 2020 are down 11% compared to the same period last year.

Although the Brazilian exports of soya beans have remained slow, it is projected that 2020 will mark yet another strong export season for Brazilian soya beans. However, although Brazilian soya bean exports are projected to remain strong, there are several variables which could interfere with these projections.

First off, the African swine fever outbreak in China in August 2018 led to the widespread culling of pigs, structurally decreasing the demand for soya beans used for feedstock.

Secondly, China has stipulated, over a two-year period, to purchase an additional US$32 billion worth of agricultural goods in the US-China phase one trade agreement, which could bring about a boost of US soya bean exports at the expense of Brazilian exports.

Lastly, the coronavirus, which has sent shockwaves through the global economy and shipping markets, could dramatically dampen total dry bulk demand growth if it continues to spread globally.

The imbalanced market fundamentals

While seasonally strong grain exports could provide for a temporary lift in freight rates, it is ever worth addressing the elephant in the room: structural overcapacity.

The panamax, supramax and handymax fleet grew by a challenging 4.5% through 2019, and with 25 m DWT on order right now, it seems unlikely that the fleet will return to a strong balance between supply and demand anytime in the near future.

Looking at the full year of 2020

The coronavirus is a massive uncertainty factor, which will limit world economic growth through 2020.

While China just now is getting back on its feet, it seems likely the worst is yet to come for the rest of the world.

BIMCO has modelled two coronavirus scenarios and reality has unfolded somewhat like its second scenario. In this scenario, focusing on China only, economic activity will start to pick up through mid-March and business activity normalise to baseline by April-May. As China recovers, dry bulk freight rates follow suit. Meanwhile conditions outside China have clearly soured in the first 10 days of March. That development is putting a lid on the extent and pace of the overall dry bulk market recovery.

BIMCO had already expected a challenging market for the dry bulk market in 2020. The high fleet growth will offset any potential demand growth and, at the very least, the IMO 2020 regulation will adversely impact dry bulk profitability through the first half of the year. The coronavirus has simply worsened the negative market outlook. Some demand has permanently been destroyed by the economic impact of the virus, and with market sentiment taking a turn for the worse, it seems likely that the dry bulk shipping industry will struggle to be on the profitability side for the coming year.

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