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2022 January 25

Prospects of dry bulk cargo shipments

Capesize bulker AWOBASAN MARU. Image source: MOL

Following the surge in autumn 2021, bulker freight rates showed a steep fall. The economic situation in China and the Omicron variant expansion will be the key factors affecting the dry bulk cargo market. At the same time, some bulkers can be deployed for container transportation amid the logistics crisis.

Baltic Dry Index which surged last October to about 5,500 points then showed a similarly fast fall. As of 24 January 2022, it is down to “miserable” 1,415 points. In October 2021, Capesize bulker freight rates were almost $64,000 per day. Now, they have reduced by over a half. Freight rates for other types of bulkers are also showing a decrease, although a smoother one. Panamax freight rates have dropped from $31,000 in October to less than $23,000, Handymax – from $35,000 to $25,000, Small Handy – from $31 to $22,000 per day (based on MOL data).

BDI dynamics. Image source: https://tradingeconomics.com

The surge of freight rates in October coincided with the growth of coal demand and, consequently the increase of coal prices. In October, coal price in China exceeded $269 per tonne. However, downward demand correction was followed by a fall of freight rates: in November, they sank to $140 per tonne. In January 2022, Indonesia improved the situation. Being the world’s major supplier of heating coal it banned coal exports from the country due to its shortage in the local market. That made coal prices to grow and now they exceed $220 per tonne. Iron ore price is also increasing: from $84.5 per tonne in November to current $130 per tonne. However, that has not affected freight rates so far.

Derek Langston, Head of Simpson Spence Young Consultancy & Research, commented: “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... 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”.

Restrictions on steel production from iron ore imposed in China for environmental reasons was a negative factor in the dry bulk shipping market. Steel production in China has been going down from mid-2021.

However, there is good news as well. Analysts of IHS Markit believe, restrictions on steel production in China should not be overestimated: transition to steel production in electric arc furnace (EAF) with utilizing scrap will take long time. The bulk of steel will be still produced in basic oxygen furnace (BOF) with utilizing iron ore.

Coal price dynamics. Image source: https://tradingeconomics.com

“Basic oxygen furnace (BOF) is still the primary route of steel production compared with utilizing scrap in the EAF production method. Mainland China is by far the largest producer of crude steel globally and currently only 11% of crude steel is produced using EAF with the number expected to slowly increase in the coming years. However, energy shortages and the rising cost of electricity will prove to be a downside risk for EAF processes in the short term as escalating costs of production will make BOF production more competitive and therefore improve the prospects of iron ore imports in 2022. Also, BOFs in most steel plants are modern and young. Therefore, replacing BFs with EAFs will take years owing to the high economic burden for many steel mills, while costly electricity needs will continue to delay the development of EAFs. Therefore, in our view, iron ore will remain as a main source of steel production in the coming years despite mainland China's increased consumption of steel scrap for steelmaking and annual steel production cap”, says IHS Markit.

Besides, recovery of India’s imports, seasonal sales of grain including Australian wheat, and the programme supporting soybean production in Brazil can contribute to the bulk cargo market this year.

In terms of newbuilds to existing ships balance, total orderbook ratio against existing fleet remained extremely low at about 7% of total dry bulk fleet. That will also have a positive impact on the freight market this year.

IHS Markit predicts that the global dry bulk tonne-mile demand will continue to grow by 4.5% in 2022, largely supported by global economic recovery-related industrial materials including iron ore (5.5%), coal (3.4%), and agricultural goods (5.1%).

Iron ore price dynamics. Image source: https://tradingeconomics.com

In our opinion, the hopes on global recovery of the industry may prove to be misplaced: the pandemic is not over, certain problems may arise due to lockdowns that can be announced in the largest ports of China amid expansion of the Omicron variant. Besides, that can result in crew rotation problems and, consequently, in reduction of seaborne cargo transportation efficiency. In general, we are cautiously optimistic about the prospects of the bulker market in 2022 and expect risks and volatility remain high.

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