What do you make of a year that has started with a new US administration, continuing geopolitical tensions, an ongoing health crisis and dry bulk shipping rates at historical highs?
2021 commenced on a positive note, earlier than what most had expected for a first quarter. Increased Chinese steel production, augmented thermal coal needs amid decade-low temperatures, strong grain demand and efforts for inventory restocking, have all meant higher rates across the dry bulk board.
That being said, the market is currently experiencing the usual lull which accompanies this time of the year that coincides with the Chinese New Year festivities. And while close to the Spring Festival the largest movement in the world is recorded while the world’s most populous nation celebrates the Lunar New Year by visiting their hometowns (and the dry bulk market somewhat stagnates), we still live in the Covid-19 era.
Chinese local governments have this year put forward several financial incentives towards mills and factories so that they keep operating and large movements are deterred amid concerns for virus spread. This probably hints that industrial activity won’t slow down its pace to the extent it usually does and power use will remain strong.
February 12th will mark the beginning of the Year of the Ox which, according to the Chinese zodiac sign, symbolizes hard work and positivity. Sounds like a good theme for 2021, doesn't it?
Robust iron ore demand, healthy coal needs
Capesizes are currently running at a weighted average of about US$11,000/d after having achieved the US$25,500 mark in mid-January. China’s construction-intensive stimulus spending, in response to the Covid-19 outbreak, no doubt supported dry bulk commodity demand and freight rates. Chinese steel output breached in 2020, for the first time on record, the 1 billion tonnes (achieved 1.05) and that seems to justify the, also record, 1.17 billion tonnes of iron ore imports into the Asian nation.
This trend seems to be continuing in 2021 thus far. Iron ore shipments into China are currently running at 30% higher compared to this time last year, while January’s imports firmed by over 10% m/m. Although declined from 2020’s peak, strong steel and iron ore prices seem to indicate that healthy demand for the red alloy still stands and will constitute a considerable driver of dry bulk demand for the entire year. If Brazilian ore output normalises (Vale estimates its 2021 production capacity at 350 million tonnes), we could expect the longhaul Brazil/China route to further support Cape rates.
The Chinese ban on Australian coal and soaring demand for the fossil fuel due to a cold winter have led China on a quest for coal suppliers other than Australia. It remains to be seen what proportion of this will be seaborne and if so, from destinations further afar that would trigger an increase in tonne-mile demand.
Although it appears that we are heading, slowly but surely, to the reduction of coal in the overall energy mix, projections for Chinese electricity consumption in 1Q21 suggest a rise to the tune of 20% y/y. The increase in power demand would ramp-up thermal generation, which for the moment is largely coal fired. As for the entire year 2021, Chinese power consumption is estimated to increase by 7% y/y.
Strong year for grains
China maintains an almost insatiable demand for grains. The country imported major volumes of grain last year and estimations for 2021 suggest that the trend will be sustained. Poor domestic harvest and food security concerns amid the pandemic, coupled with pig population recovery, have risen demand for imported cereals and oilseeds used as animal feed.
According to the United States Department of Agriculture, Brazil’s yearly soybeans production in 2021 will reach (despite the delayed harvest) the all-time high of 133 million tonnes. This of course highlights the South American country’s capacity for exports most of which will be shipped to China. The longhaul grain trade significantly underpins returns for Panamax bulkers, currently running at an average of close to US$16,000/d.
Furthermore, China has already booked its highest-ever volume of US corn for delivery in the 2020/21 marketing year, while prospects for a weaker dollar will likely encourage further purchases of US agricultural goods. A questionmark of course remains as to how the new Biden administration will handle the tariff dispute between Washington and Beijing, which of course goes beyond purchasing commitments to commercial cybertheft and the Chinese system of industrial subsidies.
Meanwhile, Australia, following significant droughts suffered over the past years, is this year poised to produce its second-largest wheat crop ever (about 30 million tonnes). Despite an admittedly bittersweet Sino-Australian trade, China is set to absorb Australian wheat – especially when Russia has imposed export tax for grains, thus rendering the commodity relatively uncompetitive.
Historically low orderbook
Another comforting factor is the historically low dry bulk orderbook (currently at about 6% of the existing fleet) as well as the small fleet growth for 2021 (projections point to a 2-2.5% net fleet capacity growth for full year 2021). The aversion to newbuilding contracting is underlined by the significantly challenging environmental framework as well as the technologies needed for the path to zero carbon emissions. And since no established technologies have emerged yet, dry bulk tonnage supply is set to be compressed over the next couple of years, while fleet utilization rate to increase.
Reserving any volatility which is of course endogenous to the shipping market, basic fundamentals, propelled by a vaccine-led global economic recovery, suggest that demand will outpace supply, essentially giving ground to a high probability for sustainable rates for dry bulk carriers going forward. Don't tell me the Ox doesn't look like a Bull.