Dry bulk’s fragile recovery

Although recent market forecasts for the dry bulk industry have offered up optimistic statistics, analysts in the shipping world are erring on the side of caution when it comes to the opinion that the sector is destined to bounce back easily from bad times. Speaking to the Baltic Briefing, Peter Sand, BIMCO’s chief shipping analyst, said: “This ongoing recovery is still in a ‘fragile’ state. Demand has gone up significantly; so has the size of the fleet. We thus call for a careful handling of fundamental balance between supply and demand.”

Mr Sand noted that though the supply side of the dry bulk sector had increased more than was necessary this year, “it’s simple human nature to ‘relax a bit’, after many years of hard work to limit supply side growth”. The analyst then said that BIMCO was now turning the attention of shipowners and operators towards careful handling of vessel sailing speeds. He explained: “A low nominal fleet growth is good, but it can easily be spoiled if sailing speed goes up significantly.”

Positive freight rates

Strengthening freight rates have given ships operators hope. In an outlook article for BIMCO, Mr Sand said that as of October 26, capesize ships have been in profitable territory since August 11, while panamaxes have experienced the same since September 5. This turnaround builds on a sustained upturn in rates: between January 4, 2016 and November 6, this year, the Baltic Capesize Index (BCI) increased from 472 to 3044, while the Baltic Panamax Index (BPI) has grown from 464 to 1567. Mr Sand also explained that handymax, supramax and ultramax owners and operators who fixed their ships after August 21 have seen freight rates cover both operational expenditures (OPEX) and capital expenditures (CAPEX), leaving a slim return on investment, something that has only occurred three times – for over two days in a row – in the last two years.

Consulting firm Capital Link gave its take on the improved outlook in a recent video. In it, Polys Hajioannou, chairman and chief executive of shipping company Safe Bulkers, said: “This year we have seen an increase of demand which so far has exceeded our expectations at the start of the year, coupled with the excess scrapping we had in 2016, and freight rates have improved meaningfully with the prospect for the next year also to be good.”

China’s shipping clout

The overarching theme that seems to have arisen from recent forecasts for dry bulk shipping is the influence China has upon proceedings. In his BIMCO article, Mr Sand said: “At the centre of dry bulk demand, as always, is China.” The analyst noted that while the country set a new world record in steel production for August of 74.6m tonnes – resulting in total growth of 5.6% for eight months’ production in 2017 compared with the same period last year – in September, it also saw its iron ore imports exceed 100m tonnes for the first time.

Mr Sand added: “While this is much needed by the dry bulk shipping industry to get out of the doldrums of recent years, there may be a limit as to how far this can go. Imagine if steel production stalls – then iron ore imports are likely only to grow at the expense of domestically mined ore.” However, he explained that despite recent reports about Chinese iron ore mines risking losing their mining licenses because of environmental issues, “the output from Chinese iron ore mines is still up by 5% in the first eight months, year-on-year. One of the key risk elements in the equation is actual steel consumption in China.” In conclusion, Mr Sand said: “Should we look no further than China when it comes to dry bulk market demand? No, is the short answer – at least not in relation to steel production ingredients – iron ore and coking coal.” This year, global iron ore imports were at 1.478bn tonnes, of which China constituted 1.075bn tonnes, or 73%.

It is not only BIMCO that is pointing up the influence that China wields. In its latest Dry Bulk Forecaster, Drewry said that China’s Belt and Road initiative (BRI) was something that will “drive dry bulk shipping in the long run”. The analyst noted: “This highly ambitious project will create strong tailwinds for dry bulk shipping, taking into account the massive planned infrastructure development undertaken by the Chinese government, which can entail an expenditure of up to $8tr by 2020.” The organisation’s lead research analyst for dry bulk, Rahul Sharan, told the Baltic Briefing: “That need to build new railway lines, that need to build new roads, new ports … all of them will require a lot of infrastructure, especially steel, so steel production might ramp up in the long-run. That might drive iron ore demand. So, the long-run prospect for dry bulk is actually bright, and that may start picking up from 2018.”

Short-term pain

However, Drewry also noted short-term pain in the form of the Chinese government’s plan to reduce steel production from this month until March 2018. Mr Sharan told the Baltic Briefing that the Chinese government planned to reduce steel production by 50% in 28 cities which are major steel producers in the country. Though Mr Sharan said that Drewry felt that 25% was a more realistic amount, this figure might still impact the dry bulk sector.

“Normally, we see that the third and fourth quarter of any cycle in the dry bulk market has been a better cycle for the owners and the first quarter is normally not that good, but this time we might see the fourth quarter also not doing very good because of the steel production cut,” he explained. Therefore, the sector could be set to undergo two disappointing quarters beginning from the start of Q4 this year.

However, China is not the only influencer when it comes to the outlook for dry bulk. Mr Sand indicated that other parts of the world may hold significant influence as regards coal.

“For thermal coal, a few other nations are worth taking note of, in addition to China,” he explained. “Those are India, South Korea and Malaysia. Additionally, the US seems to have re-established itself as an option in the seaborne coking coal market, providing long distance voyages into Asia.”