Dry bulk shipping: China remains the driving factor, but coal policy is disrupting the market
Seasonal factors are currently increasing demand, while geopolitical developments, in particular around Chinese coal imports, are pulling on the brakes.
Demand drivers and freight rates
The second half of this year continues to prove much stronger than the first with China continuing to make up for the lower demand in the rest of the world. Despite the strength of the past few months, average spot-market earnings in the year to date across all ship sizes are at loss-making levels, with time running out to turn this year around.
Biggest losses have come for Capesize ships which, despite jumps of up to USD 35,000 per day, have so far this year averaged USD 2,204 per day. Timing here has proven crucial, and decisions as to when – and for how long – to fix a ship on charter has made all the difference to profit and loss. In the first five months of the year, average earnings for a Capesize averaged USD 5,094 per day – around a third of what is needed to break even. On the other hand, between 1 June and mid-November earnings averaged USD 20,247 per day.
A second ship size losing more than USD 1,000 per day is the Supramax, which averaged daily losses of USD 1,537. In contrast to the Capesize market, there have been no large swings in Supramax earnings, rather a gradual increase from mid-May to September, since when they have flattened at around USD 10,000 a day.
Although average spot-market earnings are loss-making this year, some owners and operators have been able to find money-making opportunities. With the right timing and preparations, an operator with a Contract of Affreightment (COA) fixed on a profitable USD/tonne basis could have chartered a ship when rates were low at the start of the year, widening the profit margin to be made on the COAs.
Support for the mid-sized ships in the last months of the year can be found in US exports of soya beans, which have been record breaking in the first months of the export season. The US soya bean marketing year runs from 1 September to 31 August, with the majority of exports coming between September and December.
In the first 11 weeks of the marketing year exports totalled 22.3 million tonnes, an 82.5% increase on the 2019/2020 marketing, and up 18.8% on 2017/2018 – the last period before China imposed tariffs on imports of soya beans from the US. As reported, outstanding sales for this season are also high (30.1m tonnes), and records could be broken, but the season is long and many unforeseen disruptions could still arise.
Since the tariffs were imposed, China has increased its imports of soya beans from Brazil to make up for lower imports from the US. Despite imports from the US growing considerably, Brazilian exports have not suffered and are up 23.7% so far this year. Many of these soya beans are going straight into stockpiles, as the Chinese pig herd has yet to recover fully to its pre-African Swine Fever levels, limiting growth in actual demand for the beans.
As with other commodities, shipping benefits while stocks are being built up, but will pay for it further down the line when – rather than increasing imports – stocks are drawn on to meet demand.
With strong exports from both Brazil and the US, China has imported a total of 83.2 million tonnes of soya beans, which is 168 more Panamax loads (75,000 tonnes) than in the first 10 months of last year. Given the long sailing distances between Brazil and the US to China, the increase in tonne-mile demand is considerable. Other grain exporters in the northern hemisphere have also provided extra demand for these ships. In the year to date, there has been a 25.4% increase in tonne-mile exports on Panamax and Supramax ships out of the Black Sea, with Russia and Ukraine the big drivers here.
In volume terms, the most important commodity for shipping is iron ore and, in this market, China’s importance is growing as well. It has already been the top importer since 2003 – when it overtook Japan – but this year it has become even more dominant. So far, its iron ore imports have risen to 975.2 million tonnes, an 11.2% increase on the first 10 months of 2019.
Ostensibly, higher iron ore imports generally mean higher steel production, with China registering an 4.5% increase in the first three quarters of the year. However, dig a little deeper and this assumption becomes more questionable. Chinese iron ore imports in 2018 and 2019 were lower than the 1.06 billion tonnes imported in 2017 yet, despite this, steel production grew in both those years. This can be explained by China using more scrap steel in the steelmaking process, reducing the need for iron ore. But if China is continuing to use scrap steel, it begs the question why iron ore imports are not just rising, but showing such strong growth?
Whatever the reason, Chinese iron ore imports are the bread and butter for Capesize ships, and their strength, especially in the second half of the year, have been the primary factor in keeping Capesize earnings above the break-even point, especially as demand elsewhere has remained muted.
China is the only major steel producer to have seen growth in the first nine months of the year. As such, its share of global steel production has risen from 53.7% in the first nine months of 2019 to 58% this year (source: World Steel Association).
In spite of the Chinese, growth has not been enough for total steel production to have risen this year, with large drops in the European Union (-21.7m tonnes) and North America (-16.5 million tonnes). Asia without China has seen production fall by 12.5%; if China is included in the statistics, it leaves the continent in the green, though only just (+0.2%). Over the first nine months of the year, global steel production has fallen by 44.8m tonnes (-3.2%) compared with the same period in 2019.
Deliveries of dry bulk ships have, by mid-November, already reached a four-year high, totalling 42.2 million DWT. BIMCO expects that, by the end of 2020, deliveries will have reached their highest level since 2016, despite the disruption to shipyards at the start of the year. Some 12.5m DWT of ships have been scrapped this year, bringing growth so far to 3.4%. BIMCO expects full-year growth to reach 3.8%, with another 1.5m DWT set to go.
The big drivers of fleet development this year have been ore carriers. These account for 54% of total demolitions, with 24 VLOCs with a capacity of 6.7m DWT having been scrapped. Though new deliveries of this ship type account for a much smaller share of the total (15.4%), the 20 new VLOCs delivered this year – some 6.5m DWT – are almost enough to replace all the capacity lost. Looking at the order book, a further four VLOCs are set to be launched this year, bringing total deliveries of hteese ships to 7.9m DWT.
BIMCO had expected the VLOC fleet to be renewed this year, as the lion’s share of the VLCC-converted VLOC carriers reached the end of their long-term contracts. These were fixed in between 2010 and 2011 with a duration of around 10 years, the end of which mean the death knell for these 25+-year-old ships. As of the start of November, only eight are still actively trading and a further seven are laid up.
BIMCO expects the pace of fleet growth to slow in 2021 to 2%, as the low order book means the number of ships being delivered will fall. Currently 23.5m DWT is expected to be delivered in 2021. Fleet growth of 2% would mark the lowest increase in capacity since the turn of the century.
The most talked about story in the dry bulk market, as the end of the year approaches, is the development in Chinese coal imports. Quotas limiting coal imports – and more recently strong anecdotal evidence of verbal notices to stop imports of Australian coal – mean new orders are being reconsidered or cancelled, and loads arriving in China are facing extended waits. Reportedly, the import stop is because of Australian criticism of China.
Based on ship-tracking data from VesselsValue, there were 133 dry bulk ships waiting to discharge in Chinese ports in mid-November, 59 of which had been waiting for 20 days or more. BIMCO is aware of some ships waiting since June 2020.
In the third quarter, Chinese coal imports were 31.9% lower than Q3 2019 and October imports were down 46.6% compared with last year – a loss of 60 Capesize loads (200,000 tonnes). The limits on coal exports will likely mean further drops in imports in the final two months of the year.
In the short-term, delays in discharging reduces the supply of ships, increasing demand for ships that aren’t tied up and providing a little support to the dry bulk market. However, in the longer term, once these backlogs have been cleared, the impact is likely to be more damaging. Although the distance between Australia and China isn’t particularly great, the volumes are important (74.9 million tonnes in the first three quarters of 2020).
A potential upside could appear if China replaced Australian coal with seaborne coal from regions further afield. As it stands, Australia and Indonesia account for 78% of total Chinese imports. Both offer short sailing distances to China, so any reduction in this share would lead to increases in tonne-mile demand. Whether or not this materialises will depend on Chinese government policy and any decisions it makes about coal imports in 2021. In particular, at what level it will set new coal quotas and how the spat with Australia develops.
Differences in how demand for dry bulk goods is developing in different regions of the world can, in part, be explained by the different focus of stimulus packages around the world. While China’s has turned out to be infrastructure heavy in a bid to boost industrial production (6.9% higher in September 2020 than September 2019), extra government spending in more advanced economies has been aimed at avoiding mass unemployment and securing consumer spending.
The Chinese approach helps dry bulk shipping, while the other gives a boost to container shipping. More stimulus is needed in many advanced economies, but this is unlikely to skew towards infrastructure spending until the health crisis has been put behind us, and if there is any money left.
To some extent, the fall in bunker prices has protected dry bulk earnings from performing even more poorly than they otherwise would have done this year. Voyage costs lower earnings; however, costs have been lower this year because of fuel prices, so earnings have been higher than they otherwise would have been.
All forecasts now point to a slow recovery in 2021, which even a 20-year low in fleet growth will not be able to make up for, leaving dry bulk shipping to face another trying year.
Source: BIMCO, Peter Sand, Chief Shipping Analyst