Five risks to check: Dry bulk shipping

Based on supply-demand fundamentals, bulk owners should have a positive outlook in the coming quarters. But in the world dominated by external factors, the fragile recovery could be derailed by many supply chain disruptions, not to mention sanctions and trade wars

News ID: 80097

Date: 30 June 2018 - 09:21

Trade tensions, Chinese policies and supply disruptions may continue to affect market landscape even as fleet growth remains low.

WHILE firm fundamentals suggest a robust dry bulk market for at least another 12 months, there is no guarantee of smooth sailing ahead.

External factors such as trade tensions, Chinese government policies and supply chain disruptions, which are often unpredictable, have continued to shape the market landscape.

Those, coupled with sanctions, low scrapping and deliveries of Vale-backed megaships, have led to great ambiguity concerning how the dynamics will change. The future looks somewhat uncertain.

According to the latest Lloyd’s List survey, capesize earnings are expected to average $16,855 per day in 2018 and about $19,450 per day for 2019. That compares with $18,511 per day in the previous forecast from the end of the first quarter.

Panamax earnings are expected to average $12,634 per day this year, marginally up from the previous estimate of $12,378.

Average earnings for the supramax and handysize segments remain similar to the earlier projections, pegged at $11,730 per day and $9,439 per day, respectively, for 2018.

Below are the five most significant risks we believe may derail the market recovery in the coming months:

Fears about a trade war intensify

Sino-US trade tension has great potential to alter trade flows and erode freight earnings.

Both China and the US have been engaged in a ping-pong game of tariffs since April this year; the White House has threatened to pursue 25% tariffs on $50bn worth of Chinese imports, to which Beijing retaliated by targeting agriculture products, including  soyabeans. In June, the two made good on the threats.

Aside from the dispute with China, Washington has also imposed extra tariffs on steel and aluminium imports from most of its top suppliers, including the European Union, Canada and Mexico.

The rising protectionism has already caused havoc for bulker owners and operators. Soyabean and sorghum shipments were redirected earlier this year, as buyers and sellers diverted cargoes to ports all over the world and made arrangements for alternative supplies.

“The uncertainty in the shipping market has already been felt,” BIMCO’s chief shipping analyst Peter Sand said, adding that “anecdotal evidence of fewer US Gulf cargoes heading for China is an indicator of this”.

Soyabean trade is crucial for the bulker market because the shipments tend to be long-haul trade.

Should China enact the tariffs, Brazil could potentially cover most of the imports from the US for this year if its logistics issues can be solved.

However, Banchero Costa’s head of research Ralph Leszczynski argues that China could lift domestic output and stifle soyabean buying in the long run if the tariffs come into effect. This could mean the collapse of many panamax and capesize routes.

Cargo disruptions

There is a wave of caution in the market surrounding this year’s commodity supply situation. And for good reason.

Several events, from strikes to industrial accidents and sanctions, have curbed shipments of iron ore and bauxite and are poised to make an effect in the months to come.

Anglo American’s Minas-Rio iron ore operation, which has an annual capacity of 26.5m tonnes, has halted its production and exports following two leaks in a pipeline that carries the ore in slurry from the mine to the export terminal.

The outage is expected to continue until the fourth quarter of the year. According to Braemar ACM, total shipments for the year may be reduced to 3m tonnes, which were already exported, from the planned 13m to 15m tonnes.

This may have triggered the warning from Golden Ocean’s chief executive Birgitte Vartdal in a recent conference call that Brazil’s iron ore exports will need to increase “significantly” for the balance of the year for capesize earnings to improve.

Meanwhile, a series of disruptive episodes has been negatively affecting trade flows of bauxite and its downstream products alumina and aluminium.

A strike at Guinea’s Societe Miniere de Boke bauxite mine  shut down production for 10 days in May, resulting in an output loss of 1.2m tonnes. Banchero Costa noted that this short-term disruption could be repeated, given there were similar protests at the mine twice last year.

What is more, the US Treasury has imposed sanctions on Kremlin-connected Russian oligarchs, companies and senior Russian officials — including United Company Rusal, one of the world’s largest aluminium producers, which accounts for about 6% of global output.

Following sanctions, Oldendorff was reportedly forced to suspend all its operations in French Guyana to avoid compliance problems. The German operator was serving Rusal-owned Bauxite Company of Guyana with a fleet of purpose-built tugs and barges, transporting bauxite mined by the company to ocean-going vessels and onwards to destinations such as Ukraine, Ireland and the US.

The supply chain shake-up has been temporarily put on hold after Oleg Deripaska, one of the oligarchs, started to divest from the Russian giant. But risks remain because Rusal is still struggling to persuade Washington to rescind the punishment by October 23, when the grace period for the sanctions ends.

Bulker owners will keenly observe whether these disruptions will continue to hamper commodity supply.

Supply-side pressure

Four of the valemax vessels ordered in 2016 have entered the active fleet of capesize tonnage since the start of 2018, while the remaining 26 are due for delivery in the next two years.

All of them will be heading for the Brazil-China iron ore trade on long-term shipping contracts as previously announced.

Still, their arrivals are set to pressure the long-haul trade seen as bread and butter by many cape owners. “Thirty valemaxes can transport around 48m tonnes of cargo from Brazil to China a year, and as a result are likely to squeeze out 67 capesizes,” Mr Sand said.

Capesize freight rates have already been depressed compared with other sizes of bulkers this year. For the first months of this year, average time-charter rates on the Baltic Exchange were $13,377 per day, still a loss-making level. If the peak season disappoints, the 2018 average could struggle to stay above the industry-average break even level of $15,000 per day.

Further, slow scrapping activity in the current upcycle is worrisome.

For the first four-and-a-half months of 2018, the dry bulk fleet grew by 10.2m dwt, equal to 1.2%.

About 13m dwt of various sizes were delivered, while as little as 1.7m dwt sold to shipbreakers, Clarksons data shows. A further of 27.6m dwt of vessels are scheduled for delivery for the rest of 2018.

While fleet growth remains low compared with trade expansion, the low demolition, despite new International Maritime Organization environmental regulations taking effect in 2019-20, suggests some owners may be holding on to their vessels for too lon.

Chinese reforms

China’s policymakers have continued to reform its economy structurally while curbing pollution. This is, unfortunately, bad news for long-term dry bulk shipping demand.

While the headwinds from the industrial cuts last winter to improve air quality are temporary in nature, Braemar ACM warns that the reforms being introduced to manage longer-term growth would result in lower shipping requirement.

The withdrawal of fiscal support, slower credit growth and weakening construction activity will continue to drag on China’s economic growth, which is expected to slow this year.

The slowdown will filter through to Chinese steel demand, which the World Steel Association expects to remain flat this year and contract by 2% next year.

What is more, Chinese state-owned steel mills are installing shredders and defining scrap processing standards to displace blast furnace pig iron, according to the Shanghai Metal Market. This will lead to more demand for scrap and less for iron ore, a net negative development for bulker demand.

No wonder some observers suggest that 2017 may have been the peak year of seaborne iron ore, because consumption in China looks set to decline for many years. In the first quarter of 2018, Chinese iron ore imports fell 0.2% year on year to 270.4m tonnes, owing to weaker than expected spring demand, record port stockpiles and trade tensions.

Looking further ahead, the International Monetary Fund has predicted China’s growth to slow to 5.5% by 2023. “We should enjoy the market while the cycle is supportive,” Braemar noted.

The weather blows

This year grain shipments have faced challenges from drought conditions at several different regions of the world.

After years of steady growth, this agricultural trade has become an important source of revenue for shipowners and operators, especially for panamaxes on long-haul routes and geared vessels in regional shipments.

However, soyabean, wheat and corn shipments, which account for more than half of total grain trades, are likely to suffer a blow this year.

A severe drought in Argentina has damaged the soyabean crop, with the US Department of Agriculture expecting a production shortfall of 14m tonnes in the world’s third-largest producer to 40m tonnes in the 2017-18 marketing year.

Also, dry weather is reducing wheat and corn yields in western Europe and the Black Sea region — a bearish development for bulker trades in the coming months. The Texas Wheat Producers Association has predicted overall lower production in Russia and Ukraine, putting the former’s grain crop at about 126m tonnes in 2018 compared with 135m tonnes last year.

Canada’s Alberta province, another top wheat producer, is also suffering from unusually dry weather that could hinder its production and exports.

All these developments are leading to higher grains prices, which in turn may further curb trade flows by dampening demand.