By Nick Ristic
Volatility
2020 has so far been the most volatile year for freight rates on record. The Capesizes in particular have seen huge swings in rates, with the market trading at opex levels for several months, followed by two $35,000/day spikes in rates.
When asked about the drivers of this volatility, Stamatis Tsantanis, CEO of Seanergy Maritime Holdings, believed that this feature has not necessarily been down to weaker demand due to Covid-19, but more so because of supply disruptions.
Mr Tsantanis argued that demand for iron ore has remained strong throughout this year, on the back of a relatively quick economic recovery in China. However supply issues in Brazil earlier in the year hit earnings in the first half of 2020, with ships at times seeing negative TCEs. Once these issues were resolved, he continued, we saw a rapid correction in rates.
We asked Ulrik Uhrenfeldt Andersen CEO of Golden Ocean, what owners have been doing to manage this volatility. He said that a balanced chartering approach was necessary to navigate these swings, taking long-term coverage where possible during weak periods, while keeping a portion of the fleet trading in the spot market to maintain exposure to the upswings.
Demand prospects
All panellists were optimistic on the longer term demand prospects of the dry market as economies around the world gradually recover from the pandemic. John Wobensmith, CEO of Genco Shipping believed that the dry market was primed to benefit from fiscal stimulus packages. He cited investment in infrastructure in China, which was likely to support steel output and iron ore imports, but also stimulus measures in other countries which would benefit other aspects of dry bulk.
Focusing on the Panamax market, Loukas Barmparis, President of Safe Bulkers, argued that despite a rough start to the year, coal demand was recovering, and that there would be greater pressure to relax import restrictions in China as we enter the winter months.
Martyn Wade, CEO of Grindrod Shipping Holdings added that the grain market has fared relatively well throughout the Covid crisis, given it is a staple commodity. He believed that global conditions were supportive of increased seaborne grain demand, referencing flooding in China which had wiped out domestic crops and weighed on stockpiles. Given that ‘just in time’ restocking is not practiced in the grain market, Mr Wade expected Chinese demand to drive greater shipments of soybeans and corn from the US, benefitting the Panamaxes and geared ships.
Emissions and decarbonization
The IMO’s planned targets for reducing greenhouse gas (GHG) emissions across all shipping markets essentially requires an overhaul of today’s fleet over the next decade, and a switch to alternative sources of fuel. Mr Wobensmith said that while LNG is getting a lot of attention, he is not convinced that it is the fuel of the future.
While LNG does offer GHG reductions of up to 20% it does not bring emissions down to the IMO’s long term targets and there are concerns over methane slip. The Genco CEO was optimistic on the prospects of hydrogen and ammonia as marine fuels, seeing these as viable alternative fuels over the next 5-7 years. He argued that ammonia was relatively attractive, given that existing engines could be modified to use the fuel, but added that costs and bunkering infrastructure plans were highly uncertain.
Mr Tsantanis also pointed out this uncertainty, and believed that in the near-term, the best way of curbing pollution is by limiting vessel speed and power, which would have an immediate impact on GHG emissions. Implementation of energy saving devices, he continued, could also have a material impact on emissions, though this requires co-operation and co-investment with charterers, adding that energy savings of 10% on a Capesize translate to a reduction of 4,000t of CO2 emissions per year.
Digitalization
We have also seen owners invest in technology as a means of reducing both costs and emissions. According to Mr Andersen, those operating large fleets have already been able to maximise economies of scale through bunkering networks and crewing arrangements, but these can only reduce operating costs so far. Amongst other strategies, he said that Golden Ocean was focusing on mass-collecting data from its vessels, in order to optimise operations. This approach aims to minimise expenditure by taking into account sea conditions, weather, fouling, the market climate and more.
Wobensmith said that Genco was also employing this strategy, highlighting that data from ships was now flowing in real-time, whereas in the past, this kind of analysis could only be done on backward-looking information.
Regulatory fragmentation
With several large players in the industry recently stating differing strategies for decarbonisation and varying methods of measuring emissions, owners are becoming frustrated. When asked what shipowners as a group need from industry bodies to properly plan for the regulations coming down the pipeline, Mr Wade replied: “unity and consensus”.
The head of Grindrod said that changes in legislation are hurtling towards us and the industry has to be radical in order to meet ambitious targets. He argued that the IMO has been too slow-moving in passing motions and that in the absence of clear direction, regional changes in regulation will complicate things further.
A likely outcome, he continued, would be some kind of carbon tax. This would differentiate ships based on their efficiency, but many charterers have historically always opted for the cheapest possible vessels. For such a strategy to be successful, performance of vessels and ESG rules would have to be taken into account.
Ordering to remain thin
The overarching theme of the discussion was that extreme uncertainty is keeping investors away from shipyards. Contracting over the past couple of years has been extremely limited, and in dwt terms, the orderbook now represents just 7% of the trading fleet.
All of the panellists agreed that this trend would continue, keeping supply growth relatively limited over the next few years, and that expensive exotic fuels would act as a barrier to entry for investors looking to renew fleets. Combined with a gradual economic recovery over the next couple of years, this should help to get dry bulk supply and demand back into balance.