Could a winning combination of supply and demand factors lead to a repeat of the boom years?

By Carly Fields

 

Dry bulk shipping finds itself in a sweet spot from the combined effects of a commodity supply squeeze, low orderbook, global infrastructure initiatives, and port congestion.

Put together, these factors have prompted shipping experts to describe 2021 as “promising” and “positive” and to start making early comparisons to the boom year of 2008. 

Speaking at a Virtual Marine Money Forum, Peder Simonsen, chief financial officer of Golden Ocean Management, said that the dry bulk markets had recovered much quicker than anticipated from the downturn in 2020. “In the first quarter, we are seeing strong rebound demand in the bulk market,” he said. While he highlighted short term congestion in the Asian market for tying up ships, taking a longer perspective Simonsen pointed up a stimulus package from China which “is going to massively support demand throughout this year and after that as well.” 

Combine that with “a very promising” supply side with the lowest orderbook seen for a number of years and decarbonisation initiatives which will accelerate the recycling of older ships, Simonsen said: “Coming from a scenario when you really didn’t know where the world would move, it does look very promising in the next two years.”

Fellow panellist, John Michael Radziwill, CEO and chairman of Goodbulk, described the dry bulk orderbook of below 7% as the lowest orderbook the market has seen since the turn of the century. “That is a huge thing and our markets usually act very well to low supply,” he said. Meanwhile, on the demand side global infrastructure initiatives are supporting trade of materials, food programmes are providing support for agricultural commodities, a spate between Australia and China has displaced trade and a cold snap has driven seaborne coal demand, soaking up a lot of ships. While some of the drivers are temporary, others have a longer tail giving Radziwell cause for optimism.

“From the handysizes up to the ore carriers it looks fairly good,” he said. “We are very positive going into 2022. Will dry bulk be as good as it was in 2008? I hope so,” he said.

We are very positive going into 2022. Will dry bulk be as good as it was in 2008? I hope so

Commodity squeeze

Andy Dacy, managing director and group head of the global transportation group at JP Morgan Asset Management, related the current strength in the dry cargo side to a number of years of underinvestment in the commodity supply side. “We see that supply squeeze starting to take effect. The good news about cycles and commodities is it takes some time to build up capacity, it’s not something you can do on a dime.” 

However, he raised the risk of more money coming into the shipping market as a shadow hanging over the positive outlook. “As an industry I think our biggest risk is having too much capital flood the market and all the overordering starting to happen again. We’ve had a lot of stimulus, but thankfully that money hasn’t made its way into shipping,” he said. “We want to manage the association we have with underinvestment on the production side – whether that’s metals, mining, agriculture. We also want to manage the orderbook.”

Shipping, he added, has “a lot of spikes on it” when it comes to investing without a proper understanding on how the markets operate. Investors and operators appear to have “learnt their lessons” in shipping. “As long as that continues, we should continue to see a balanced market for the next couple of years at least.”

Radziwill said that there is not a great deal of liquidity or public interest in shipping business right now. He predicted that the wave of retail money currently pushing up technology stocks will start moving into the commodity markets causing bubbles and a sizable rise in commodity prices. “This wave of retail investors will overinflate commodities market and that will be good for us - typically when the commodities spike there is more activity and demand.

Investors and operators appear to have “learnt their lessons” in shipping

ESG moves

Turning to Environmental, Social, Governance (ESG) requirements, the panel were agreed that this is a key consideration in financing today. 

Dacy commented that in Europe, institution investors are already very focused on ESG and that the trend is moving to the US. While it is currently less prevalent in Asia, it is “definitely heading that way”. “ESG is here to stay,” he said. “I don’t see it going away and shipping will have its challenges in terms of navigating that. There might be certain sectors that might fall out of favour.” Radziwell described ESG as “something that we should learn to live with and embrace”.

Dacy continued that ESG financing considerations will hit some sectors harder than others, so “you need to think about where you are putting your dollars and assets”. He highlighted the tanker market as one of particular ESG concern from an investor perspective. 

However, the caveat is that shipping is a capital-intensive industry and there will not be an overnight switch from diesel to electric power, for example. Dacy said that one of the challenges from the previous decade is that private equity was invested into smaller shipping companies that were asset play in nature. This meant that ESG-related initiatives were limited. He hopes that future investment in bigger companies, guided by ESG requirements, will see capital investment in more progressive, environmentally-friendly decarbonising technologies.