Talk of super cycle dismissed
But while they stopped short of acknowledging the super cycle, they did agree that there is a cyclical upturn taking place and that dry bulk operators can look forward to continued positivity for the foreseeable future.
Panellist Rahul Kapoor, vice president and global head of commodity analytics and research, maritime and trade at IHS Markit, noted that commodity demand will remain firm in the medium term, largely supported by strength in the Chinese economy, which escaped a significant hit from Covid-19. He saw commodity demand combined with ship supply normalisation as underpinning growth.
“The headlines out of China have been fascinating. In the midst of a global pandemic, China was setting commodity records and that has only continued. China is still the key driver and is likely to remain so for the foreseeable future,” he said.
“Shipping industry returns have fared poorly over the last decade. We have seen bankruptcies and people leave the industry, but the difference today is that overcapacity has been reduced which is underpinning our view of the market.”
The analyst believes that the so-called ‘super cycle’ is being inflated by supply side disruptions. On the demand side, all the key drivers of dry bulk demand will continue to grow for the foreseeable future, he said, although there is some hesitation on thermal coal demand.
Fleet in check
IHS Markit’s research shows that the dry bulk fleet-to-orderbook ratio is nearing its lowest in decades and that there is unlikely to be a significant rebound in newbuilding orders. “Even stronger rates will not lead to a significant increase in ordering because of the environmental regulations,” he said. “If you hear news of orders, that is likely to be replacement rather than speculative.”
Overall, Kapoor sees the profitability curve moving up for the next few years with freight rates increasing for dry bulk.
However, there is a caveat to Kapoor’s positive outlook: India. He said the dry bulk sector needs to pay attention to how the country recovers from the latest wave of Covid-19 infections to hit its population.
Looking at the different dry bulk sectors, Kapoor sees continued upside for capesize freight rates in the short term. While he is bearish for the sub-panamax and supramax sectors in the short term, overall the shipping sector is expected to attract much better returns than it has for the past few years.
“Overall we are positive,” he said, but added that it is very “good to be sceptical” in the dry bulk market. “We have seen many false starts, but the difference now is the low orderbook. We are not seeing everyone rushing back to order ships, mainly because of the environmental issues which will keep a control on fleet growth.”
Consequently, IHS Markit expects the current cyclical upturn to be maintained over at least the next two years.
China steel challenges
Ian Roper, general manager of Shanghai Metals Market (SMM), agreed with Kapoor’s assessment that the market is not in a commodity super cycle. “Short term absolutely things do look very strong, but this is certainly not a commodity super cycle with the environmental trends we are seeing.” Instead, he described is as a global restocking cycle as markets play catch-up.
Looking at commodity production in China, Roper expects steel output to grow again in 2021, however longer term there will be challenges to this growth as China pulls back its support. He pointed to steel inventory trends that are in line with normal trends – a sign that the underlying demand is not as strong as people are expecting.
“We worry that in the second half of the year we will start to see negative data points,” he said.
Seaborne iron ore supply is expected to grow 80mt in 2021 after four years of zero growth, but again this will hang on continued support from China.
Roper pointed to China’s 14th five-year plan as a sign of change that is coming in terms of support for commodity demand. “This plan is a bit of a shift change from a commodity side of things. From a steel perspective it doesn’t look so supportive. Urbanisation is clearly slowing, and big programmes have come to an end. China will be cutting its total rail buildout but to counter that is growth underground in subways that are much more steel intensive,” he said.
Roper added that China is clearly committed to reducing emissions and that will lead to lower Chinese steel production five years from now and less consumption of iron ore. “At the same time China is investing in security of supply, so they could bring on iron ore supply – what will that displace,” he asked.
Source: The Baltic Briefing