Dry bulk operators optimistic despite uncertainty

Even with a Chinese rebound, growth in dry bulk commodities demand will most likely be well below the growth in fleet capacity. ​

News ID: 80496

Date: 20 April 2020 - 13:51

​Although sluggish market sentiment has hit freight rates for the dry bulk segment, ship operators think they can rely on a rebound in the Chinese economy to support demand in the second half of the year.

DRY BULK owners are holding out for an upturn in demand and spot market rates in the second half of this year, as earnings have remained below breakeven levels for most classes of vessel.

The coronavirus pandemic has effectively written off any hope of making much in the way of profits this year as rates in the past three months fell below breakeven levels and the Baltic capesize index moved into negative territory for the first time ever this year, in its almost 30-year history.

The demand for industrial and consumer goods has plummeted. This means the demand for the raw materials used in manufacturing processes is also set to suffer dramatically. This will hurt the demand for bulkers.

Forecasts on rates for the third quarter are a little better than the second quarter, but shipowners could still struggle to generate profitable returns from charter rates.

Although the International Monetary Fund made an unprecedented reversal of its global gross domestic product forecast for the current year, taking it from +3.3% a couple of months ago, to -3%, dry bulk owners are relying on Chinese economy to normalise in the second half of the year, with economic stimuli adding to the usual seasonality.

While China has so far not announced the official GDP projection for the year, the IMF projection issued last week forecast a growth rate of 1.2%.

“We notice that the People’s Bank of China cut interest rates further on April 15, with broad credit growth accelerating, perhaps an indication that fiscal stimulus is working through the system,” Clarkson Platou Securities said in a recent note.

Ralph Leszczynski, the head of research at brokerage Banchero Costa, argued that with “the economy in China suffering due to reduced external demand for Chinese manufacturing exports, and therefore the risk of rising unemployment, the government is likely to take refuge in the tried and tested policies of more investment in infrastructure, which will boost demand for iron ore and other raw materials.”

The greater role of east Asian economies in the dry bulk trades should partially shield dry bulk trades from the full negative effect of the lockdowns in most other parts of the world, he said.

Despite all this, growth in dry bulk commodities will most likely be well below the growth in fleet capacity, and might even be zero or negative, which will of course have a very negative impact on the freight market, Mr Leszczynski conceded.

Khalid Hashim, the chief executive of Thai dry bulk operator Precious Shipping, however, believes that a V-shaped recovery is on the cards for the dry bulk segment.

“In terms of stimulus, our last calculations showed that some $10.5trn of stimulus had been legislated by different governments around the world to combat the ill effects of the coronavirus.” He pointed out that this is almost 11.7% of world GDP being thrown at the problem, “so the recovery, when it does come, will be very strong.”

Meanwhile, grain and bean trades have been showing remarkable resilience during these trying times, helping owners survive the virus outbreak.

While year-on-year soyabean exports fell 14% in the first two months, 11.6m tonnes were exported in March just after the economy reopened, sending total exports for the quarter into record-breaking territory, BIMCO data shows.

Danish grains consultancy BullPositions’ managing director Jesper Buhl noted that the demand for grains and beans is unlikely to be significantly dented by the current turmoil.

“The world’s inhabitants still have to eat, and pigs need to be fed. National and global trade policies are likely to shift in a less trade flow friendly direction, but good soil and growing conditions cannot easily be relocated to somewhere closer to consumers.”

Can supply help?

Unfortunately,  not for now. This is because even the usual supply-side levers are not at shipowners’ disposal at present. The closing of the ship-recycling yards in the Indian sub-continent region has placed a pause on what was shaping up to be a strong year for scrapping.

According to Evercore ISI analyst Jonathan Chappell, newbuilding deliveries for 2020 were already set to re-accelerate before the demand downshift. This means that even with likely delivery delays, the capacity prospects would depend on scrapping.

“The good news is that owners acted swiftly to the onset of the coronavirus, with overall scrapping already exceeding full-year 2018 levels; however, with most ship-breaking nations in lockdown, removals have ground to a halt, limiting one of the few levers shipowners could pull to attempt to bring dry bulk utilisation into balance.

“All told, the supply and demand balance for 2020 has worsened meaningfully from just three months ago, which — combined with lower-than-forecasted first quarter spot rates — is likely to result in unfavourable year-over-year rate trends and another year of losses across the sector.”

Mr Khalid expects many more ships will head for the beaches due to the very low freight markets once India, Pakistan and Bangladesh restart their shipping recycling yards, mostly because of the fact that costs from drydocks, special surveys and retrofitting ballast water treatment systems will all require a lot of money.

Mr Leszczynski expects a 3% net fleet growth expansion for dry bulk this year, with some delays in deliveries compensated by less-then-expected demolition.