SSY Outlook Report - Dry Cargo

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Seldom has a year been as eventful as 2021 for the dry bulk freight market. Vessel earnings across all main bulker sizes jumped to 13-year highs buoyed by recovering demand outside China, coal and iron ore prices spiralled to record levels, and smaller bulkers were suddenly in demand for both container and de-containerised cargoes due to supply chain dislocations creating chronic capacity shortages in the boxship market.

It was also a year when Covid-related fleet inefficiencies in the form of quarantining and stricter crew change requirements played a highly significant role in tightening vessel supply, which, when combined with weather-related disruption at China’s terminals, served to push the bulker markets higher.

Capesize average timecharter rate assessments from the Baltic Exchange leapt close to $87,000/day in October, at a time when Panamax, Supramax and Handysize equivalents were all above $34,000/day. Despite that extraordinary headline figure from October, across the whole 12 months, the Capesize TCs did not perform as strongly relative to their smaller counterparts as in previous years.

Seaborne iron ore trade growth proved slender in 2021, with Australian iron ore exports among others running below year-ago volumes, offsetting the influence of emerging Capesize coal trades from the Black Sea coal terminal at Taman. Juxtaposed against the vibrant dry bulk freight market were several significant trade negatives, many of which emerged through the second half of the year so posing intriguing questions for the market outlook in 2022.

Several key Pacific trades lost momentum, either due to seasonality (nickel ore) or pressures from surging commodity prices (such as Indian coal-fired plants reducing import demand or the withholding of Chinese fertilisers from the export market to ensure domestic supply). Against a background of softening geared vessel demand, a downward jolt to Pacific rates in November was prompted by a sudden drop in coal chartering activity into China, as downward correction in coal prices caused buyers to pause international purchases.

In addition, Chinese steel production slowed down sharply from the middle of 2021 onwards. When originally reported in the 3q21, the goal of holding 2021 full-year crude steel output below the 2020 level for environmental reasons may not have appeared realistic, given the rapid 60 Mt annual expansion in January-June.

However, for July-November a yearly drop of around 75 Mt was recorded, suggesting an overshoot of the annual target, with weakening end-user demand increasingly in evidence.

Steel exports sank to a 13-month low of 4.4 Mt in November, which compares with a four-year high of 8.0 Mt in April. The 2h China slowdown extended beyond steel, with minor bulk imports experiencing year-on-year declines. According to customs data, combined imports of ten cargoes ranging from forest products, fertilisers to various ores and concentrates in JulyNovember dropped by close to 9 Mt from the year-ago total to 133 Mt. In contrast, 1h21 volumes rose by more than 13 Mt to 153 Mt.

These apparent negatives for vessel demand highlight the importance of fleet inefficiencies in tightening vessel supply and supporting freight markets.

Turning to next year, much will be dependent on the evolution of the pandemic as well as any policy response to support China’s economy. Further complicating the outlook has been the timing of the Beijing Winter Olympics in February 2022 with several events to be held in Hebei province, still the single-largest province for steelmaking.

True to form, extended restrictions on steel production and iron ore sintering during the 1q22 have already been announced. There can be no doubting the pressures on credit and the real estate sector in China, but we are also aware of the potential for some form of stimulus package should the government deem it necessary.

Although facing structural decline in many parts of the world, coal trade dynamics still exert a significant influence on the dry bulk freight markets. Fluctuating coal import volumes into China are likely to contribute to freight rate volatility in the Pacific once again, and the Indonesian coal export ban announced for January 2022 is an example of how government intervention can distort trade flows.

Recovering Indian coal imports would be a positive for bulker demand, as would some grain trade seasonality, with Australian wheat and Brazilian soyabean cargoes lending support in early 2022. The newbuilding orderbook equates to less than 7% of the existing dry bulk fleet.

Although annual newbuilding contracting in 2021 ran at more than double the pace of the previous year, by the standards of previous strong markets (when the Baltic Exchange Dry Index averaged 3,000+ points annually) this percentage is comparatively low. China’s zero-Covid stance leaves terminals at risk of disruption should a small-scale outbreak be detected. The increased transmissibility of the Omicron variant is likely to lead to an extension of restrictions on crew changes and port calls, so entrenching fleet inefficiency in bulker trading patterns into 2022.

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