Capesize leads the buoyant sentiment
What everyone seems to be talking about is the impressive threshold the capesize market passed; that is the US$30 000 mark that capesizes went across on average daily returns. They did, however, soon adjusted to circa US$27 000/d which is a satisfactory number still. This change on capesize earnings should not be viewed as a mere drop, but better a correction stemming from the spot market’s inherent volatility; sentiment remains positive.
China’s reopening has of course a significant role to play in this upward trend on freight rates as the Asian nation consumes about 70% of the world’s seaborne iron ore. What its coronavirus-induced shutdown during 1H20 meant, was that a significant backlog had been created. Further, by the time the country resumed its industrial activity, Chinese steel inventories started to steadily ease (following an all-time high in March), currently standing higher at an only 4% y/y.
Brazil and Australia are both trying to capitalise on China’s strong demand for the raw steelmaking ingredient, both pushing their production and exports into China to larger volumes. Brazilian Vale’s efforts to maintain its annual guidance for ore production are of crucial importance, since the steady cargo flow from the South American nation into China is pushing the tonne-mile demand upward, thus positively assisting the freight rates for the capesize types.
Australia’s ore exports have also increased, with indicative the month that has just passed: the country broke records in June by exporting 51.7 million tonnes of iron ore. Forecasts for capesize earnings remain positive for the balance of the year (virus permitting).
Panamax rally has commenced
What we should keep in mind while assessing the panamax spot market as well as where it is headed, is that for the last three years Q3 rates have been higher than Q4, contrary to the usual seasonal patterns. Despite the year 2020 being abnormal in various way, this can very well be the case with a strong 3Q20 currently in play. A Tess 82 kamsarmax type is now worth over US$14,300 per day in the spot market.
The recovery of China’s industrial production mobilised not just its thirst for ore, but also coal. Australia’s coal exports into China and India have increased over the last weeks, offering support to the panamax vessels open in the Pacific. That being said, China and India are both promoting their domestic mining industries, therefore posing considerable risks to the short-term outlook of overseas coal demand.
South America and Black Sea have been the hot regions for panamax players, who are relying on the strong grain exports of said regions in order to achieve better rates. US grain exports have also peaked and we’d expect them to climax during the new marketing year, commencing September. Despite the fact that a lot of speculation has enfolded the Sino-US Phase One trade pact, it appears that China is honouring its commitment to the deal - at least as far as soybean and corn purchases are concerned. We expect Asian grain demand to keep being a significant source of support for panamax carriers as the year progresses.
On the back of this merry sentiment, period activity has increased as well. The higher FFA marks have to some degree led the physical market and supported the achievable hire for longer periods. A standard type panamax can now write about US$11 000 for one year.
Demand set to outstrip supply
To build or not to build? The question has been answered. Technological and environmental regulations, the virus turmoil, oil prices fluctuation and the recent low-earnings environment have shaped a highly volatile space - even more so than the usual volatility everyone who’s been in the market for a while is used to. The dry bulk newbuilding orderbook remains at historical lows, at the moment standing at 7.4% of the fleet. This is one of the lowest points it’s ever been over the last two decades.
Given the approximate two years that it takes for a bulk carrier to be built, this means that we should be able to cruise over the next couple of years with demand outpacing supply. While China is in the process of reviving its economy, the country’s stimuli is expected to be a pillar of support for the dry bulk freights and asset prices going forward.
The contraction of the dry bulk orderbook is having direct impact on the net fleet growth projected rates over the next couple years: 3% for 2021 and only 1% for 2022. The declining tonnage supply also improves the fleet utilisation projections, with forecast models suggesting that by year 2022 the fleet utilisation rate will reach 88% from the current 85%.
Despite the highly uncertain moment in time the dry bulk market operates in, we remain cautiously positive for what’s to come. If we manage to avoid a second coronavirus wave, the supply/demand fundamentals paint a positive landscape that we all want to look at. As with everything, time will tell.
Read the article online at: https://www.drybulkmagazine.com/dry-bulk/14072020/eastgate-report-mid-year-dry-bulk-contemplations/
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