After a lackluster first quarter, dry bulk market participants are pinning hopes on revival in freight rates, with China’s gradual economic recovery and signs of rebounding embattled property sector likely supporting bulk demand in Q2.
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Contrary to market expectations, the reopening of the Chinese economy after the pandemic failed to lift the freight market, while demand for iron ore – a major dry bulk commodity — perked up in Q1.
Beijing has set a GDP growth target of around 5% for 2023, according to a government report released March 4.
The key Platts Cape T4 index, a ton-mile weighted average of four key Capesize routes, averaged at $13,876/d in Q1, down 22% from the corresponding period last year.
Similarly, the KMAX 9 Index, a ton-mile weighted average of nine key Panamax routes and the APSI 5 Index, a ton mile weighted average of five key Supramax routes in the Asia-Pacific, averaged at $10,220/d and $8,901/d in Q1, down 65% and 55%, respectively from Q1 2022.
Spike in iron ore, coal demand
Several market sources said the rebound in iron ore demand would be a key factor in supporting dry bulk shipping rates. China’s iron ore imports were about 309 million mt in Q1, according to data from S&P Global Commodities at Sea, up almost 9% from the same period last year.
“China is getting its property sector back on track and this might be positive for the shipping markets,” said a ship-operator source, adding that the Chinese government’s policies supporting property sector may increase demand for seaborne commodities used in the construction industry.
Similarly, Chinese coal demand is likely to surge due to an expected increase in energy usage from expanding manufacturing activity. “It will take time for China to step up [its economic activity] and increase the production [of goods],” said a shipbroker source. This could help drive seaborne coal movement from Indonesia and Australia to China, which in turn will support freight.
Indian seaborne coal imports are expected to follow a similar trend as that of China. While India’s domestic coal production is expected to grow, most market sources expect demand growth at a faster pace, which will be met by imports.
China and India’s coal imports reached 81.3 million mt and 52.9 million mt in Q1, up 78.25% and 6.7%, respectively from the corresponding period last year, according to CAS data.
Stable freight market expected
While market sources are upbeat about higher time charter rates in Q2, the mixed showing of forward freight agreement (FFA) or freight derivative markets has clouded the outlook.
“Q2 would likely be better in my view, [and clearly] it can’t get any worse when [the market had seen] zero earnings on a time charter equivalent [during the seasonally low Q1 market]. But how much higher it can go, I am not certain,” said a shipowner source.
Given the forward curves for the sub-Capesize segment are not showing a strong contango or backwardation for the rest of 2023, the freight rates going forward could be largely stable, a second ship-operating source said.
“A lot would still have to depend on China’s subsequent demand for dry commodities,” added the ship-operator source.
Tonnage supply balanced
For now, geopolitical tensions could threaten existing trade flows and volumes. “No doubt the foundations [for a resurgence in dry bulk freight rates] are there from China’s reopening, but geopolitical issues are the most unpredictable factors,” said a third ship-operator source.
Meanwhile, the balanced dry bulk fleet fundamentals could be a safety net for freight rates with the net fleet growth expected to be minimal given the relatively low number of new buildings slated for delivery over 2023 and 2024.
“The supply of ships is not growing massively and it could have [positive] impact on the rates,” said a fourth ship-operator source, adding that rates may not decline significantly due to tight availability of dry bulk vessels.
The presence of overage ships may push for increased scrapping of older vessels to comply with operational and environmental regulations.
“The average age of the Capesize fleet is increasing [as many units] ordered during 2008-2009 would gradually reach 15 years of age by 2023-2026,” said a shipowner source.
Source: https://www.spglobal.com/