By Jeffrey Landsberg
Sentiment in the dry bulk market became extremely bearish at the start of this week due to Evergrande concerns — but actual dry bulk freight rates all climbed higher that day. As we stressed in a client note at the time, the Evergrande issue was not having any impact on actual dry bulk spot fundamentals, and this remains true today as freight rates have climbed even higher. While the Evergrande issue could still easily result in more short-term periods of volatility and panic, our view has been that there is only a very low chance of it causing a sudden drastic decline in Chinese homebuilding and/or a “Lehman” type spillover into the broader company. For the dry bulk market, spot fundamentals remain encouraging.
In our view, the Evergrande situation remains more than anything a stark reflection of current government policy in China and is a reminder of longstanding problems lying under the surface of the Chinese economy (and also the global economy at large). The Chinese government has been continuing to stress this year that it is working to reduce speculative excess in the economy, but the government of course does not want a wave of defaults. Commodore's view has been that the government will do what is needed to ensure that no systemic spillover occurs. Regarding the housing market, the government also has continued to focus on reigning in the housing sector, but the government of course does not want a sudden collapse in the housing market. Our view has been that we expect the government will continue to work on fostering more moderate growth in the overall housing market.
China’s government is incredibly powerful, and we anticipate that it will continue to focus on reigning in parts of the economy while also continuing to generate moderate economic growth. What is also very interesting about Evergrande, however, is that the company has never reported a loss — including most recently in the first half of this year. It has been troubling (but not at all surprising to us) that a company that has always officially been profitable is having difficulty meeting debt obligations. For many companies globally, generating regular profit is seemingly of no concern these days — and for some other companies, the profit that is reported at best likely only exists from extremely creative accounting. This has been a global issue we have remained concerned about for a great many years. For the dry bulk market at least, shipowners this year continue to make very real and impressive profit.