Prelude
Ensuing one of the most generous and fertile trading years of the recent past with an annual average of some 2943 points, Baltic Dry Index stepped into the new year with a rather tepid and lukewarm feeling. In fact, one should take a long trip down the memory lane to draw a parallel of the spot market’s steep downward correction in end of 2021, with Capesizes mainly being under severe pressure. In spite of the adverse currents, our clients and friends replied to our annual sentiment survey in early January that they remain “cautiously optimistic” for the next twelve months – or at least the majority of them. Indicative of the prevailing bullish sentiment is that “optimistic" or "cautiously optimistic” gathered 25 percent and 60 percent of the replies respectively. In comparison to our previous survey one year ago, “optimistic" was chosen by 15 percent less market participants whereas the second more bullish option by circa 3 percent more. Conversely, the percentage of the survey respondents believing in a “rather pessimistic” period increased from 2.6 percent to 15 percent since our 2021 sentiment survey. Among other factors, the early January’s downswing of time-charter rates combining with anticipation of a softer global economic growth painted the view of most of the respondents with less vivid colours, albeit quite bright nevertheless. In sharp contrast to Baltic indices’ downward trend, market sentiment remained relatively robust during the first trading days of 2022.
Against this backdrop, the gauge of activity in the dry bulk spectrum – the Baltic Dry Index – balanced at 2285 points in the first trading day of 2022. Contextualizing, ranging from 673 points to 7070 points, Baltic Dry Index annual averages ebbed and flowed during the last thirty-eight years, averaging 115 points below the 2,000- point mark. However, Baltic Dry Index doesn’t follow normal distribution. Indicatively, just eleven out of the thirty-eight years managed to stand higher than the all-time average levels. From the remaining, twenty-one years had averages within the 1,000-1,900 boundaries whilst the remaining six averaged below the psychological trap of 1,000 points.
Given the aforementioned, 2022 was a rather fertile year in terms of performance, as the 1934 points (as of 23 Dec) it averaged is placing it well above BDI’s median value. Additionally, hovering few points above the average value of the thirty-eight-year horizon, the trading year that just ended managed to keep the market afloat. Steaming decisively through rough seas and facing quite a few headwinds, the challenging 2022 really carried it off with its bow always being afloat.
As it transpired, the eventful 2022 didn’t manage to fulfill the great expectations of standing substantially above an average year mainly due to sluggish demand for seaborne trade, tighter monetary policies, zero-Covid draconian measures and less congested ports around the globe. The typically seasonal lethargic start made its appearance again in the first quarter, pushing daily hires materially lower. However, this downward pressure lasted for just few weeks, with the spot market regaining some of the lost ground. The second quarter diverged from the typical flight plan, trending mostly sideways. It was the third quarter though that engraved to memory, as the Baltic Dry Index oddly kept losing steam day by day, plunging into the three digits for the first time in more than two years. In a similar vein, the fourth quarter further deflated from the aforementioned levels, displaying acrophobic symptoms to the recent past heights.
Reflecting back on the four-act year, four issues stand out: geopolitical tension and conflict, persistently high inflation and aggressive monetary tightening, dry bulk shipping and commodities at a deflationary course, concerns about global growth and rising Covid-19 infections in China.
Act I – "What is past is prologue”
The trading year embarked to the first quarter of its 2022 trip in rather meek spirits, anticipating a reversal of the previous period harsh downward correction. In spite of the descending trend of late, Baltic TCAs continued lingering well above OPEX in all segments. In fact, the BCI-5TCA laid at $19,490 daily, BPI-TCA 25,865, BSI-TCA at $24,303 and the BHSI-TCA at $25,322 on the closing of the first trading day of 2022. On the S&P front, five-year-old eco Capesizes changed hands for circa $47m whilst same-aged Kamsarmaxes for $33m, both considerably higher year-on-year. In sync, a typical fiveyear-old Ultramax was sold for around $30m and a modern 38,000dwt Handy for $25.5m, or circa 69 and 73 percent above the respective early 2021 figures. In the paper market, all forward curves were in backwardation, albeit with flattish parts on the front end.
After a couple of weeks with the spot market reporting $5,000 losses, the third week of the trading year kicked off with a slew of data, including China’s fourth-quarter GDP. In reference to the locomotive of global growth, China's economy expanded by 8.1 percent in the previous year, far exceeding the government's own targets. It has to be noted that the aforementioned figure was largely distorted by a historic collapse in activity at the start of 2020. As far as the fourth quarter goes, gross domestic product expanded by 4 percent year-on-year, according to data from the National Bureau of Statistics. Weakening growth in the closing months of 2021 suggested that trouble was still on the horizon as the country contended with a deepening real estate crisis, renewed Covid outbreaks and Beijing's zero Covid policy.
Against these developments, the People’s Bank of China cut the oneyear policy loans rate by 10 basis points to 2.85 percent and the rate on seven-day reverse repurchase agreements to 2.1 percent. Furthermore, Beijing lowered mortgage lending benchmark rates as monetary authorities step up efforts to prop up the slowing economy. In early January, Chinese Premier Li Keqiang stressed the importance of implementing macro policies innovatively, better unleashing market vitality, stabilizing the macroeconomy, and keeping the economy running within an appropriate range. But he reiterated that the government would not resort to "flood-like" stimulus. With Baltic Capesize Index having lost some 91.5 percent of its value in just few months, an outpouring of stimuli might sound as an alluring scenario to Capesize owners. However enticing it might sounded though, all omens were not favoring such a plot twist.
t was early October 2021 when IMF stressed that global economic upswing was continuing, even as the pandemic resurged. However, economic recovery lost momentum since then, hobbled by the highly transmissible Delta variant and its repercussions. Adverse developments since the aforementioned World Economic Outlook (WEO) had a negative impact on many major economies, with global economy entering 2022 in a weaker position than anticipated. Meanwhile, inflation had been higher and more broad-based than initially anticipated, particularly in the United States. Adding to these pressures, China's housing sector was having a bumpy year start, as some of the country's most high-profile developers were struggling to shake off a crisis that had been ballooning for months.
In this juncture, global growth was expected to moderate from 5.9 in 2021 to 4.4 percent in 2022 - half a percentage point lower for 2022 than in the October WEO, largely reflecting downward revision in the two largest economies. In China, pandemic-induced disruptions related to the zero-Covid policy and prolonged financial stress among property developers induced a 0.8 percentage-point downgrade. In reference to the world's largest economy, supply shortages, a more hawkish monetary approach and a less expansionary fiscal policy produced a downward 1.2 percentage-points revision. In the euro area, prolonged supply constraints and Covid-19 disruptions produced a less severe markdown of 0.4 percentage point.
Bearing all these in mind, Fed chair signaled a tougher stance on inflation the last week of January. With a strong labor market and inflation well above 2 percent, the Committee expects it would be appropriate to raise the target range for the federal funds rate. Fed Chairman Powell’s hawkish stance at a press conference following the Fed’s January meeting sparked a sharp stock market sell-off. The US dollar, on the other hand, surged to its highest level in nearly 18 months. Whilst a strong dollar and a global economy losing momentum were rarely pro-shipping conditions, seasonality took the lion's share of the negative impact to the Baltic Dry Index during the first trading month of the year. However, the FFA market demonstrated a late January spasmodic positive reaction, hinting an underlying confidence going forward.
At the same time as the IMF was stressing that global growth was expected to moderate from 5.9 in 2021 to 4.4 percent in 2022, the latest OECD Composite Leading Indicators (CLIs) pointed towards the same direction. The CLIs, which are driven by factors such as order books, confidence indicators, building permits, long-term interest rates, new car registrations and many more, are cyclical indicators designed to anticipate fluctuations in economic activity over the next six to nine months. Among major OECD economies, a drop in momentum was visible across the board in early February. In the US, the CLI pointed out a stable growth, although the CLI level was below its long-term trend. In reference to the second largest economy, the CLI for China (industrial sector) continued to point to a loss of momentum, dropping below its long-term trend. In India, the CLI continued to anticipate stable growth, whereas in Brazil the indication was for a sharp growth slowdown.
Better reflecting the course of the global economy, Handies touched multi-year highs of $37,109 daily in late October 2021. Growth in regional trades, a strong rebound in global economy and the 'decontainerization' of some cargoes unfolded nicely for the Handysize. Riding this wave, Handies enjoyed a period of vivid activity during the last two quarters of the previous year, positively surprising many who were under the impression that the least volatile among the segments were in fact dull as well. Since late October though, the leading index of the sector's workhorses was in a downward spiral to an early February closing of $17,819 daily. Much of that contraction could be largely attributed to seasonal factors, yet still the alarming signals from the OECD Composite Leading Indicators couldn’t be ignored.
Whilst Handies kept losing steam, the US Consumer Price Index (CPI) moved towards the opposite direction in February, returning to early 1982 levels. In fact, the US Labor Department stressed that consumer prices jumped 7.5 percent in January compared with a year earlier, the steepest year-over-year increase since February 1982. On a month-on-month basis, CPI rose by 0.6 percent, the same as the previous month and more than economists had expected. The so-called core CPI, which excludes food and energy, rose 6.0 percent over the last year, or up from 5.5 percent over the 12 months to December. The energy index rose 27.0 percent over the last 12 months and the food index increased 7.0 percent. Ultralow interest rates, heavy doses of federal aid, increased commodity and energy prices, shortages of supplies and workers, and robust consumer spending combined to send inflation leaping.
With commodity prices on the high end, yet still below their recent multi-year highs, 'Doctor Copper', a nickname associated with copper for its ability to predict pivotal turning points in the global economy, followed closely. After a 26 percent rise during 2021, copper prices have struggled for direction during the first two months of 2022. On the one hand, the decelerating locomotive of the global growth, namely China, posed some concerns for the course of the soft red-coloured metal prices. On the other hand, copper stocks once again continued to fall, approaching historically low levels.
Against this backdrop and with a risk-off sentiment in wider financial markets, copper trended lower in mid-February, after a short-lived rally that propelled the price to its highest in four months. The seventh week started with Russia stressing that President Vladimir Putin would personally oversee military drills involving “strategic forces”, at a time of soaring tensions at the country’s border with Ukraine. The defense ministry said the exercise would include multiple practice launches of intercontinental ballistic missiles and cruise missiles. The air force, units of the southern military district, as well as the Northern and Black Sea fleets would be involved in the huge nuclear drills. US troops and hundreds of vehicles, on the other hand, entered the Czech Republic from Germany in the third week of February en route eastwards to Slovakia for NATO's Saber Strike military drills. Whilst the aforementioned games were the focal point of the western world, Beijing eyes were fixed on commodity prices for yet another week and in particular iron ore. In fact, China's state planner held what it called a "reminding and warning" symposium with domestic and foreign iron ore traders on February 17 in an effort to ensure market stability.
China's planner told some iron ore traders to release excessive inventory and reduce stocks to reasonable levels, following a joint investigation with the market regulator in Qingdao. With weekly inventory in excess of 155 million tonnes, threats, promises and friendly warnings can alter players' expectations, sending not only iron ore prices lower but also Capesize spot rates. The eighth trading week started on the right foot, with Baltic indices reporting gains across the board. With BCI TCA increasing by $1,443 and BPI82 TCA by $594, the gearless segment made their intention clear to move higher, concluding the first trading day of the week at $15,331 and $21,969 daily respectively. In tandem, BSI TCA and BHSI TCA were in an upward trajectory, concluding higher at $25,758 and $23,504 respectively. On Tuesday, World Steel Association was anything but in line with the aforementioned positive feeling of the spot market. Association's data indicated a softer tone in one of the most important industries for the dry bulk sector. In fact, global crude steel production declined by 6.1 percent in January compared with the output in January 2021 and it was also lower by 2.4 percent compared with December 2021.
Global steel output was estimated at 155 million tonnes compared with 162.9 mt in January last year and 158.7 mt in December 2021. With China registering negative growth for the seventh consecutive month, the above reading came as no surprise. In particular, the world's leading producer furnaced an estimated 81.7 Mt in January 2022, down some 11.2 percent on January 2021. Conversely, steel production in India continued to be on the positive side with the output rising by 4.7 percent year-onyear to 10.8 mt. Japan produced 7.8 mt, or down by 2.1 percent, at the same time as the United States were having a monthly output of 7.3 Mt, or up 4.2 percent year-on-year. Whilst one of the largest and most dynamic industry associations in the world posed some concerns for the derived demand for shipping services lookingforward, Baltic indices kept steaming north. Reporting further increases, BCI TCA touched one-and-a-half-month highs of $18,181 and BPI82 TCA stood shy of $25,000 daily on Wednesday's closing.
On Thursday though, the western hemisphere woke up, with news of Russian invasion of Ukraine spreading out uncertainty in communities as well as markets. Oil prices surged, with Brent breaching $100 a barrel for the first time since 2014. European stock futures plunged 4 percent as investors dumped riskier assets. US wheat and corn futures rose by their daily trading limits on Thursday, while soybeans reached the highest level since 2012. Gold prices jumped more than 2 percent to their highest in over a year. Furthermore, raising fears that a war in Europe would fuel higher inflation and derail economic growth also had a negative bearing on market sentiment.
Against this backdrop, Ukraine's military suspended operations at its ports. Russia had earlier suspended movement of commercial vessels in the Azov Sea until further notice, but kept Russian ports in the Black Sea open for navigation. With most of the shipping offices around the globe trying to assess their exposures to the current geopolitical crisis, many boats fixed and failed in the Atlantic in the last week of February. In this context and with FFA values plunging, the tone in the Atlantic spot market was rather muted.
As hostilities continued in Ukraine and Russian forces pressed their advance on the capital Kyiv, Canada, the EU, Japan, New Zealand, Taiwan, the United Kingdom, and the United States unveiled a series of sanctions against Russia targeting mainly banks, oil refineries, and military exports. Western leaders froze the assets of Russia's central bank, limiting its ability to access $630bn of its dollar reserves. Selected Russian banks would also be removed from the Swift messaging system, which enables the smooth transfer of money across borders.
These measures aimed at “asphyxiating Russia’s economy”, according to the French Foreign Minister Jean-Yves Le Drian. In this context, a growing list of Western companies were planning to exit Russia. Boeing suspended maintenance and technical support for Russian airlines. Apple said it stopped sales of iPhones and blocked app downloads of some state-backed news services. HarleyDavidson suspended shipments of its bikes to Russia. Setting aside the headline-grabbing responses of some of the largest corporations of the western Hemisphere, Russia is not only importing goods and services but also exporting a wide range of commodities. Russia is among the world’s five top exporters in a broad set of commodities, from gas and oil to coal and wheat. Imposing sanctions to all these trades would not leave the rest of the world unaffected.
Big energy consumers were boycotting Russian crude, pushing oil prices above $110 a barrel in the first week of March. In sync, wheat futures in Chicago touched multi-year highs. Other commodities including aluminum and coal also soared, in a move that will have profound effects on global businesses and consumers. In Europe, wholesale natural gas prices reached almost €200 per megawatt hour while thermal coal surged beyond $400 a tonne. Energy markets had largely been spared from sanctions deployed by the US, EU and UK on Russia’s financial sector, but typical buyers were effectively selfsanctioning. Dry bulk trades were a mirror image of energy markets, with most of the participants being in a selfsanctioning mood too. “Doing business with Russia has an elevated commercial risk, with uncertainty around payment systems and new sanctions coming.” Norden CEO Jan Rindbo stressed characteristically. He further added that “This self-sanctioning (along with other companies) had a bigger impact than official sanctions".
Rising trade uncertainty sent global commodity prices skyrocketing, reporting the biggest weekly rally in more than 50 years. The S&P GSCI index, a barometer of global raw material prices, increased by some 18 percent during the first week of March, leaving it on track for the sharpest rise on records. Under these circumstances, trading activity in the dry bulk sector was quite numb in early March, with uncertainty being on a rise.
Whilst energy and food prices kept galloping, the Rome-based Food and Agriculture Organization (FAO) stressed that it was not clear whether Ukraine would be able to harvest crops if the war dragged on, while uncertainty also surrounded the prospects for Russian exports in the coming year. Additionally, Russia is one of the world’s most important exporters of the three major groups of fertilizers - nitrogen, phosphorus and potassium. Rising input costs in turn could impact next season’s harvest, leading to elevated food prices in the longer run. Hence, international food and feed prices could rise by up to 20 percent as a result of the conflict in Ukraine, triggering a jump in global malnourishment, the United Nations food agency warned in the second week of March. As another eventful week was approaching to its end, IMF Managing Director Kristalina Georgieva stressed that the war in Ukraine and massive sanctions against Russia had triggered a contraction in global trade, forcing the International Monetary Fund to lower its upcoming global growth forecast.
On the other hand, the spot market observed solid fixture across the board in mid-March, temporarily making the supply-demand deliberation less relevant. Handysize segment was in a mood to shake things up a bit. Reporting weekly gains of circa $2,000, the workhorses of drybulk sector managed to stand at $29,922 daily, or circa $8,000 and $4,000 above the respective mid-March closings of Capesizes and Kamsarmaxes! On the same wavelength with Capesizes, Supramaxes were trending mostly sideways to circa $32,000 daily. Being under mild pressure, Kamsarmaxes lingered at around $25,000 daily, losing some of their vividness in the first three weeks of March.
On Wednesday 16 March, all eyes were on Fed’s meeting. After four years and with commodity prices galloping, the Federal Reserve lifted its benchmark interest rate by a quarter of a percentage point, bringing the target range to 0.25 to 0.50 percent. According to Federal Open Market Committee statement, indicators of economic activity and employment continued to strengthen. Job gains were strong in recent months, and the unemployment rate declined substantially. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia caused tremendous human and economic hardship. The implications for the US economy were highly uncertain, but in the near term the invasion and related events were likely to create additional upward pressure on inflation and weigh on economic activity. In this context, the Committee decided to raise the target range for the federal funds rate and anticipated that ongoing increases in the target range would be appropriate.
Emphatically towards the opposite direction, Chinese Vice Premiere Liu He indicated plans to take measures to boost the world’s second largest economy. China’s Financial Stability and Development Committee promised “substantial measures” to shore up growth and flagged other supportive actions. The Finance Ministry stressed that it won’t expand a property tax trial this year. Additionally, China’s cabinet said it would resolve risks around property developers. After a brutal 12 months for Chinese equities, the Hang Seng China Enterprises Index was trending strongly upwards. Property stocks rallied the most in more than a decade. Wall Street's three major indices enjoyed strong gains as well. In tandem, European stocks reported substantial weekly advances.
As it has become apparent from the aforementioned, a divergence in the monetary policies of the US and China was more obvious than ever. However, monetary policy was not the only field that US and China have failed to bridge their differences. United States President Joe Biden and his Chinese counterpart, Xi Jinping, began in mid-late March their first direct talks in months, amid growing US concern over Beijing’s relationship with Russia and its stance on the war in Ukraine. Following the meeting, Chinese President Xi Jinping stressed that China and the United States must not only guide their relations forward along the right track, but also shoulder their share of international responsibilities and work for world peace and tranquility, according to the state media Xinhua. On the other hand, the White House stressed that President Biden “described the implications and consequences if China provides material support to Russia”. With diplomatic chasm remaining unbridged and monetary policies sending contradicting signals, the spot market adopted a wait and see stance during the eleventh week of this tumultuous trading year.
In some respects, the 'specific gravity' of Russia and Ukraine in the global economy is relatively small. Together, they account for just 2 percent of the global GDP and a similar proportion of total global trade, with limited bilateral trade with most countries. However, Russia and Ukraine do have an important influence on the global economy, being key commodity exporters. In particular, the combined exports of the two countries account for about 30 percent of global exports of wheat, 20 percent of corn, mineral fertilisers and natural gas, and 11 percent of oil. The prices of many of these commodities increased sharply since the onset of the war. Disruptions to wheat, maize and fertilisers risk raising hunger and food insecurity across the world and particularly in emerging market and low-income countries.
The World Bank said in the last week of March that a number of developing countries face near-term wheat supply shortages due to their high dependence on Ukrainian exports. However, the fertilizer crisis was in some respects more worrying because it could inhibit food production in the rest of the world that could be in position to take up the slack. Additionally, soaring metal prices could affect a wide range of industries such as aircraft, car and chip manufacturing. Against this background, the moves in commodity prices and financial markets since the outbreak of the war, if sustained, could reduce global GDP growth by over 1 percentage point in the first year and push up global consumer price inflation by approximately 2.5 percentage points, according to OECD’s estimates.
In this unstable and fragile economic juncture, world crude steel production for the 64 countries reporting to the World Steel Association was 142.7 million tonnes in February, a 5.7 percent decrease compared to February 2021. With the aforementioned in mind, Capesizes were also negatively affected from the top steelmaking city of Tangshan’s decision to implement a temporary lockdown on the last Tuesday of March to avoid further cases of Covid-19 as infections surged. On top of that, the slowdown in Chinese coal imports had also a bearing on Capesize market sentiment. Conversely, all the other segments trended upwards, largely ignoring macroeconomic omens. Leaving behind for a moment the initial shock from hostilities in Ukraine, Panamaxes along with Supras and Handies reported significant increases of their value few days before the ECSA grain peak season started in April.
Against this background, the most China-centric among segments, Capesizes, had a respectable average of $14,756 daily for the first quarter of 2022, or up 26.8 percent from the average of the first quarters of the last five years. However, the aforementioned quarterly average lay well below Q1 performance of the previous trading year let alone the stronger second half of 2021. As far as the Panamax segment goes, the BPI 82 TCA experienced a teeming first quarter average of $23,218 daily, or 65.5 percent above that of the five years and some 123.7 percent higher than the respective figure of the last ten. With three-month average for Supramaxes at $25,156 daily and for Handies at $24,084 daily, freight market of the geared tonnage run unleashed, reporting 87.7 percent and 89.7 percent higher averages than their trailing five-year ones respectively. Additionally, by considering a broader horizon, one has to go back to 2010 to find similarly fruitful first quarter averages in the geared spectrum.
On the S&P front, having an average price for the first quarter of 2022 of $40.5m, run-of-the-mill five-year-old Capesizes were on the market at circa eight million dollars above their Q1 five-year average. With a higher by six-and-a-half-million price tag, eco fiveyear-old Capesize units had a Q1 average of $47m. Modern Kamsarmaxes had an average price of $34.5m during the last three months, or $8.5m above the respective average of the last five years. Moving down the ladder to the geared tonnage, market for five-year-old Ultras and same-aged large Handies lingered on average at $31.5m and $27.5m respectively, or some 31.9 percent and 48.6 percent above the average prices of the Q1s between 2018 and 2022. That being said, it has to be noted that market expectations in the closing of this quarter are materially different compared to its start. With the bold Capesize exception, all other asset ending prices are currently balancing above the aforementioned average figures.
As market was leaving behind the most fertile first quarter of the last twelve years, the dynamics of the last period, albeit turbulent, shaped a lush trading environment. Looking forward towards the seasonally strongest period, market sentiment remained rather mixed, anticipating a few spikes but being quite uncertain for the overall average.
Data source: Doric