The plunge in dry bulk transport: a bad sign for the Chinese economy?

It wasn’t just container shipping that brought in the money last year. Dry bulk shipping had its best year in a decade. This year is different.

Container spot rates have fallen, but contract rates are up, supporting average rates. Ongoing port congestion is tying up container ships and partly offsetting the decline in freight demand. Container lines will earn even more in 2022 than in 2021.

Not so dry bulk. Spot rates have fallen and bulk carrier owners are much more exposed to spot prices than container lines. Dry bulk congestion has eased, freeing up significant capacity on the market. Owners of dry bulk carriers could be back in the red by the end of the year.

China appears to be the culprit for much of the dry bulk reversal, especially for large bulk carriers known as Capesizes (vessels with a capacity of around 180,000 deadweight tons or DWT) which are heavily dependent on Chinese imports of iron ore and coal.

“The Cape Town market continues to be as appetizing as a bucket of prawns on a hot day,” broker FIS wrote on Tuesday. “While the index’s decline has slowed today, that’s mostly because we can’t really fall much further as we get closer to Earth’s core rapidly.”

Tariffs for sub-Capesize bulk carriers known as Panaxes (65,000-90,000 DWT) and Supramaxes (45,000-60,000 DWT) – which carry a wide variety of cargo, are less dependent on China and have tariffs more in line with movements in global GDP – are also sinking.

What is happening in the dry bulk market could be an indicator of worsening economic difficulties in China and elsewhere.

The feeling is ‘the worst in many years’

By October, average Capesize rates were over $80,000 per day, and some individual ships were earning over $100,000 per day. On Tuesday, the Baltic Capesize Index pegged fares at just $8,783 per day. It’s not only well below the all-inclusive break-even point, which includes financing costs, it’s below operating expenses (crew, stores, etc.)

Freight futures are also down. Brokerage SSY said Capesize forward freight deals for calendar year 2023 were offered Tuesday at $14,900 per day and 2024 contracts at $14,750 per day.

According to Breakwave Advisors, founder of ETF Breakwave Dry Bulk Shipping (NYSE:BDRY), “Freight futures, especially those expiring beyond next month, are purely driven by expectations. Earlier this year, memories of last year’s daily rates of $100,000 raised hopes of a repeat, driving futures to inexplicably frothy levels that have now snapped back to reality.

“The Ongoing Cash Market Collapse Is Negatively Impacting Trader Sentiment [and is creating] very significant losses on many freight books.

“The weak market reflects China’s current recession in the real estate sector… [which is] very crucial to the expedition,” Breakwave said. “It’s something that should have been easily identifiable months ago. But it wasn’t, as traders were blinded by vivid memories of the past. Currently, the sentiment is the worst it has ever been. been for many years.

Chinese recovery to the rescue?

China’s steel production – which underpins imports of iron ore and coal – fell to 907 million tonnes in July, down 6% from June, according to the World Steel Association.

The hope in dry bulk shipping circles is that China will unveil a major stimulus package in the second half of the year to offset economic hits from shutdowns and the real estate crisis.

“Our view is that absent a historic collapse in the Chinese economy, the coming stimulus efforts will serve as a catalyst for a major resupply of iron ore, and therefore, a rapid increase in demand. dry bulk,” Breakwave said.

The counter-argument: According to a report by the Australian Financial Review, Morgan Stanley thinks China is reluctant to roll out significant levels of stimulus; that even if it did, there would be a six-month lag before it materially appeared on commodity markets; and China’s domestic iron ore stocks are currently high.

Prices for medium and small bulk carriers are also falling

During parts of the 2021 dry bulk rally, as well as this year, smaller bulk carriers have outperformed larger ones. Smaller ships still perform better than Capesizes, but at lower rates; the sub-Cap ship classes are also retreating.

According to Clarksons Securities, average Supramax spot rates were the equivalent of $17,700 a day on Tuesday. Supramaxs earned almost double in March.

Panamax rates had fallen to $17,000 a day on Tuesday. Panamax rates approached $30,000 per day in March.

(Chart: Clarksons Securities. Data: Clarkson Research Services, Clarksons Securities)

Dry Bulk Stocks Head South

US-listed dry bulk stocks have performed exceptionally well in 2021, posting triple-digit gains. They continued their ascent in the first five months of the year, despite negative news about China’s economy due to COVID-19 lockdowns and that country’s real estate crisis.

However, since the beginning of June, dry bulk inventories have trended lower, in line with the evolution of rates and freight futures. Star Bulk (NASDAQ:SBLK) – whose ships earn more from their exhaust scrubbers – is down 22%, Safe Bulkers is down (NYSE:SB) 23%, Grindrod (NASDAQ: GRIN) by 26%, Golden Ocean (NASDAQ: GOGL) 30%, Eagle Bulk (NASDAQ: EGLE) 32% and Genco Shipping & Trading (NYSE: GNK) – which has a high exposure to Capesize – 38%.

(Graphic: Koyfin)

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