DynaMarkets Monitor - Dry Bulk down in the doldrums.
The start of 2020 has been a pretty awful time for the dry bulk shipping market, both in absolute terms and relevant to other shipping sectors. While pressure on earnings had been building through the fourth quarter of 2019 following surprisingly elevated earnings through the late summer and early autumn, nobody was expecting the shock to come. The confluence of market pressures that came together through January and February, including but not limited to the spreading of the COVID-19 disease, the extended Chinese New Year Holiday and the impact of lockdown measures on local, regional and the international economy caused a shock to both supply and demand for the sector. Two major issues include poor fundamentals and ongoing overcapacity.
On the demand side, the initial lockdown in China, which coincided with the seasonal downturn in industrial productivity around the Chinese New Year holiday, led to a reduction in available labour for manufacturing, supply chain disruption both for raw materials, semi-finished and finished products and COVID-19 based restrictions on industrial activity in key manufacturing regions. Furthermore, these pressures have now been given an international dimension with nationwide lockdown policies being put in place through most of Europe, North America and Asia. The market has therefore seen a significant fall in cargo demand for raw materials such as coal and iron ore attributed to falling industrial output and reduced power generation requirements.
In terms of supply, production levels and capacity have taken a hit as a result of the implementation of new hygiene and social distancing rules at source, reduced productivity through the supply chain and the difficulties associated with staffing and labour levels. An illustration of some of the sources of cargo disruption in certain markets have been summarised below as reported in the latest edition of the DynaMarkets Monitor.
Indonesia, a key supplier of low cost thermal coal to the wider Asian region, has extended its lockdown and put in place a sweeping travel ban across almost all land transport until the end of May. Under the proposals, both workers and the coal supply chain will be severely hindered. It is understood that inventories in countries usually relying on Indonesian exports are sufficiently high and the decreased demand is helping relieve some pressure but as the number of infections climbs in Indonesia the longer term impacts could lead to a difficult period for the sector. The restrictions have also coincided with the government’s export ban on nickel ore, which has removed yet another source of cargo for the smaller vessel sectors such as the Supramaxes and Handymaxes. As of the time of writing, the Indonesian government has resisted calls from within the nickel supply chain to reign in the restrictions.
Vale S.A., the largest iron ore producer in Brazil has cut its capital expenditure and production outlook for 2020 in light of the production and supply chain difficulties caused by the COVID-19 disease. In multiple locations, the policy responses to the outbreak have restricted the flow of minerals through ports or along railway corridors and closer to the source, working practices have had to change to adhere to strict social distancing and confinement measures. Other producers, including Anglo-American will also be cutting capital expenditure in the coming months in order to sure up their financial positions.
European demand for coal imports has fallen to a 30 year low. The decline is part of a wider trend as policies both at a national and European level take aim at coal fire power stations. The latest to announce sweeping measures to reduce coal utilisation is Germany, which follows other major economies such as the UK in attempting to bring coal consumption down. Overall, in February EU countries imported just 3.7 million tons of coal, down 59% year-on-year. The shift away from coal has been further helped by the glut of cheap natural gas available via LNG imports, traditional pipelines and from storage facilities.
The knock on effect from the difficult period for the ethanol market is also beginning to impact the grain markets. It has been reported that industrial use of corn could fall by as much as eleven million tons over the course of 2020. Corn output, and therefore shipping is expected to fall through 2020 although in terms of world grain production, the fall will likely be offset by the increases in wheat production. The reduction in demand also coincides with export restriction polices in Russia and a handful of other major Black Sea producers. Additionally, a prime example of the impact of falling corn demand can be seen in Kenya. The supply chain disruption that has also coincided with the severe restriction in ethanol demand had led farmers to switch to better performing crops. While Kenya remains a minor producer, the situation in Kenya could be repeated elsewhere as farmers attempt to respond to challenging market conditions.
Finally, the brewing geopolitical and diplomatic dispute between Australia and China over the source of the COVID-19 outbreak could begin to impact the iron ore trade and the wider trading relationship in the coming months. Australia has been pressing for an independent investigation into the source of the outbreak and has implied that questions exist over China’s handling of the initial cases and China has not responded well. Leading Government officials have stated the importance of the trading relationship but also mentioned ‘economic coercion’ as a policy response tool if Australia does not soften its tone. At the current time, this remains a relatively minor war of words but with Australia’s economy looking to open up in the coming weeks the iron ore exporters could be watching on nervously.
Despite the challenges, certain trends have begun to emerge that may lead to an uptick in sentiment in the coming months and into 2021.
The dry bulk orderbook, according to the latest figures available, now equates to around 8.5% of the current fleet, or 75.5 million-dwt. The fleet growth in the coming years will be led by the Capesize segment, with the orderbook now standing at 11.2% of the existing fleet, followed by the Panamax sector, with an orderbook equating to 8.8% of its fleet. Of the total orderbook, around 54% is scheduled for delivery in 2020, around 41.1 million-dwt. Notably, in what may turn out to be an important development in the dry bulk fleet, Vale has announced its intention to phase out its controlled fleet of around 25 Valemax Very Large Ore Carriers (VLOC). The vessels, used on the Brazil to China trades, are likely to be scrapped as there are so few ports and terminals that can accommodate them, in addition to their age and safety concerns. Wider fleet growth is likely to be offset by an increased level of scrapping once India begins to open up from its COVID-19 enforced lockdown. In this regard, rumours have been circulating that around ten large bulkers are primed for scrapping off the Bangladeshi coast.
These development come at a time that tonnage across multiple sectors are heading into lay-up, with the exception of tankers. Lay-up managers have reported a spike in lay-up berth utilisation and this has led to a sudden requirement for alternative locations. The weakness in the dry bulk market has caused many owners to look for such opportunities at a time when rates have fallen to or below operating expenditure levels. Furthermore, a notable trend is that younger, more complex vessels are also heading into lay-up.
With almost every major economy facing a historic downturn in economic growth as result of some of the issues mentioned above, governments will look to ease the pressure by implementing wide ranging stimulus measures. If the early reports do in fact materialize, the dry bulk sector may see an increased level of demand arising from the construction and infrastructure sector. The most important market in this regard is China and as of the time of writing, few details have emerged as to the size, nature of likelihood of such sweeping measures.
While this is no doubt one of the weakest periods for the markets for a number of years, these bright spots may point to an improved outlook for late 2020 and 2021. Yet, just as the end of 2019 turned sour, there is little certainty for the beleaguered dry bulk sector at this time.