Dry bulk trends as we enter summertime: The Baltic Dry Index has hit 1–month high on firmer demand for bulk carriers offering some relatively optimistic signs
Capesizes supported by firm iron ore demand
The capesize segment is seen supported by the robust steel production in China, the world’s largest steelmaker. This, in turn, has increased demand for the raw ingredient of iron ore and therefore has been assisting the capesize carriers, both on the physical and paper side. Indeed, capesize earnings have been steadily recovering, although they remain in a low territory, hovering in the low US$4,000’s/d region. Hence, if something is to be highlighted is the market trend that appears upward, rather than the actual spot values which have not yet reached healthy levels, especially so for those units that are burdened with finance. Cape futures have been also underlining the market’s optimism for the coming quarters.
Iron ore stockpiles in China are at the lowest level in nearly 4 years, another positive omen for an increased demand for imports going forward, along with announcements of an infrastructure-intensive stimulus package. On the supply side, Brazilian miner Vale has maintained its previously announced target for its iron ore output for full year 2020. Brazilian exports are of significant importance not only because Brazil is China’s second largest iron ore supplier, but also because the usual Brazil/China route constitutes one of the longest routes in the seaborne dry bulk trade and hence significantly affecting the tonne-mile dynamics.
Political tensions between China and Australia have surfaced over the past couple weeks, but we don’t expect them to have a severe impact on Australian iron ore exports into China, as the latter does not have a solid alternative to source the steelmaking ingredient from. To put things into perspective, Australia’s iron ore accounts for about 62% of China’s ore imports.
Mixed bag for panamaxes
Demand for coal imports in China and India, which is a key driver for panamaxes, is admittedly precarious with the first likely to impose stricter curbs on overseas imports of the fossil fuel for the balance of the year and the latter heavily supporting its domestic mining industry at the expense of seaborne imports.
However, the panamax sector is highly supported by fronthaul grain shipments, as has been consistently happening post the coronavirus outbreak. Brazil’s rich soybean harvest along with its competitive pricing have been aiding its exports, while Chinese demand for the oilseed has remained strong and thus supporting these vessels that transport it. It is worth noting that May 2020 was the second-highest month ever recorded for Brazilian soy shipments, registering a 45% y-o-y rise, with about ¾ of the exported soybeans heading to China. The South American grains have supported panamaxes and assisted in pushing their average spot earnings up to US$7,100/d.
That said, a possible further escalation of tensions between China and the US has recently made headlines. If it is realised, it can very well jeopardise the commitments made under the Phase One trade deal and minimise the US grain export volume into China, seasonally peaking September onwards.
Macro picture cautiously optimistic
Macro dry bulk supply/demand fundamentals remain fairly positive, which essentially means that we should expect demand to outpace supply and bulk carriers’ earnings to improve as the year progresses. And while the world reopens and hopefully the worst of the pandemic is behind us, it is highly likely for a new inventory cycle to commence offering some much needed support on freight rates. Subject of course to the highly volatile moment in history we are currently undergoing.
Source: EastGate Shipping