Twists and turns of the dry bulk market


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Derek Langston

Head of SSY Consultancy & Research

 

After a year when China’s dry bulk demand helped prevent the Covid-driven global contraction in dry bulk trade from being even more severe, demand prospects for 2021 hinge on not just China’s continued strength of demand, but also on the scale of recovery in the rest of the world. China’s importance to bulker demand is hardly new with combined imports jumping from 440 Mt in 2005 to 1.83 billion tonnes in 2019, but last year’s collapse in 2q industrial demand in the rest of the world has intensified the country’s significance to cargo volumes.

The most explosive example has been iron ore, which is crucial for Capesize demand, where annual import growth into China spiralled to more than 100 Mt in the first 11 months of 2020, the fastest growth for six years. Although the World Steel Association’s Short Range Outlook from October projected flat growth in steel demand for 2021, rising domestic steel prices and a 11-year high for delivered iron ore prices in December 2020 highlight in part the apparent robustness of Chinese steel demand, while recovering demand from other steelmaking centres can add to trade growth.

October was the first month since February to see annual growth in crude steel production in the world outside China and the world’s second largest steel producer, India, had recorded 3.5% year-on-year expansion by November. Significantly for seaborne iron ore trade, soaring prices indicate not just firm demand, but also actual and anticipated constraints on supply. For the main arterial Capesize iron ore trades, the ability of mining companies, especially those in Brazil, to raise output will be crucial in shaping this year’s trade growth.

Coal has suffered the greatest reverse of the main dry bulk cargoes, on course for an annual decline over more than 100 Mt. Prospects for recovery are complicated by not just the pace of recovering demand, but also by the structural challenges facing producers from worldwide efforts to reduce carbon emissions. Yet this only tells part of the story. Coal imports into Vietnam and Turkey provided rare examples of import growth in 2020, and Vietnam is likely to see further incremental gains in steam coal imports in 2021. From being one of the worst affected by Covid lockdowns in April 2020, Indian imports have seen a sharp recovery. China’s coal import policies are likely to have far-reaching effects. At present the apparent aversion towards Australian coal and rising domestic steam coal prices has benefitted coal suppliers in Indonesia, and US coking coal exporters have reported more interest from China.

In contrast to coal, grain trades (including soya) are maintaining their upward trajectory. After another virus, African swine fever, forced many countries, particularly China, to cull pig herds in 2018-19, subsequent restocking has driven animal feed demand, driving soyabean trade higher. An intriguing development with significant implications for trade flows is emerging in the form of China’s coarse grain imports. In December the US Department of Agriculture forecast for Chinese corn imports in the current trade year to September at 16.5 Mt from an estimated 7.6 Mt in 2019/20. Allowing for anticipated changes in supply, US corn is well-positioned to expand its market share in China, while reduced expectations for crops shipped from the Black Sea imply reductions in shorthaul trades into the EU. US corn exports typically ramp up from the 1q, potentially improving demand for Ultramax through to Kamsarmax vessels on longhaul trades to China. Reduced soyabean crop forecasts for Brazil after last year’s all-time high are a reminder of the vagaries of weather and have also contributed to the six-year high for soyabean prices.

Steel-related bulk imports into China was a key driver of geared tonnage demand in the Pacific during 2020, but steel flows elsewhere have suffered. Those hoping for a swift end to US import tariffs by the incoming administration may be disappointed as such a move may neither be immediate nor complete. It can be expected that 2021 will bring less Covid-related disruption to ore mining operations. Very significantly for tonne-mile demand, many of the anticipated developments above feature fronthaul trades from the Atlantic to Pacific, be it bauxite from West Africa, corn and soyabeans from the US and South America, iron ore from Brazil and East Coast Canada and even some recovery in coal volumes from Colombia and the US. Balanced against the gains in volume on Brazil’s longhaul iron ore trades will be the greater involvement of 325k dwt Guaibamax tonnage alongside 400k dwt Valemaxes. A key question for this year is the extent to which fleet inefficiencies will continue to distort vessel supply/demand balances. Since the beginning of 2020, the capacity of the dry bulk fleet expanded by a net 3.9% to mid-December (with demolition activity low by historical standards), but fleet carrying capacity during this time has faced numerous constraints from Covidrelated delays resulting from crew change complications and quarantining in addition to chronic berthing delays in China’s terminals since June. Will there be a repeat in 2021?

The causes of last year’s vessel queues in China were multiple: the sudden jump in the number of Capesizes arriving laden with iron ore, exacerbated by bad weather at some locations. However, berthing delays to Panamax and Capes laden with coal from Australia added another dimension, seemingly part of a wider deterioration in relations between the two countries. The dry bulk carrier newbuilding orderbook has declined to historically low levels relative to the existing fleet: at 54.5 Mdwt in mid-December 2020, it equates to just 6.1% of the existing capacity, the lowest percentage in almost 30 years (more than 80% of which is due for delivery by the end of 2021). While the low orderbook owes in part to a lack of certainty over future market direction, it also reflects doubts over the speed at which financially viable designs for new low carbon ships can be developed. Draft approvals on decarbonisation at the IMO’s Marine Environment Committee in October (MEPC 75) throw up little prospect of an immediate regulatory-driven acceleration in demolition. The dry bulk market of 2020 witnessed many twists and turns for both vessel demand and supply, and this year will no doubt bring more.

You can read our full outlook for 2021 here.

 

 

While every care has been taken to ensure that the information in this publication is accurate, SSY can accept no responsibility for any errors or omissions or any consequences arising therefrom. Figures are based on the latest available information, which is subject to subsequent revision and correction. The views expressed are those of SSY Consultancy and Research Ltd and do not necessarily reflect the views of any other associated company. Reproducing any material from this report without permission from SSY is strictly prohibited.

 

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