Following The Freight

This year has emerged as a remarkable time for the dry bulk shipping markets as the world recovers from COVID-19 and trade flows increase.

Spurred by robust commodities demand, all vessel classes ranging from Handysize to Capesize have seen a healthy rebound of freight rates, with all signs indicating further momentum into the third quarter. Looking back at the performance of the dry freight index by the Baltic Exchange, the industry has seen a dynamic turnaround with levels above 3000 points, due to a high volume of demand for iron ore and coal. As of 30 June 2021, the dry freight index closed at 3383 points, which is approximately six times the value from the prior year (May 2020, 504 points), after the outbreak of the COVID-19 pandemic.

Governmental growth targets of the Chinese economy seaborne trade flows have spurred demand for raw materials and increased tonne miles. According to the latest estimates from the World Bank in June, China’s economy will post the highest annual growth in 2021. Assuming the continued suppression of COVID-19, growth is projected to reach 8.5% this year. For the next year, the World Bank predicts growth to slow to 5.4%, as low base effects dissipate and the economy returns to its pre-COVID trend growth.

This year’s Chinese GDP growth will be the highest annual growth in a decade and is well above the country’s offi cial target growth of 6%.

In the iron ore trade, the fi rst six months ended with a 2.6% increase in Chinese imports (560 million t) over the same period in 2020. According to the customs data, robust steel production and strong profi ts at mills fuelled Chinese iron ore demand, sending prices for the raw material to all-time highs. The value of imported iron ore surged 71.7% on an annual basis during the January - June period. The surge in Chinese iron imports kept pace during July and ended up 24% higher than the previous year, customs data showed. It is said that the jump in imports mainly came from non-mainstream suppliers as shipments from Brazil are still suffering from the pandemic.

With the ban on Australian coal imports still in place, Chinese imports shifted to alternative points of origin, creating a signifi cant impact on the dry bulk freight market dynamics for smaller ship sizes. June was the seventh straight month of this restriction, causing

interesting changes in the relevant trade patterns. Indonesia remained the primary source to feed the need of the world’s second largest economy for coal.

In the agricultural segment, China’s corn imports reached the highest level on record in May as the country’s purchases ramped up on growing demand from the feed industry, signalling record high demand for 2021. China’s General Administration of Customs showed that the country imported 3 million t of corn in May, which pushed the year-to-date total of corn imports to 11.7 million t, up more than three times on 2020’s year-to-date total.

Cargo flows

As outlined, Chinese macroeconomic trends and the dynamics of iron ore, coal, and grain imports from the world’s second largest economy during the fi rst half of this year influenced the positive growth of seaborne cargo flows.

The fi rst half of this year confi rmed the strong sentiment for imports as the global volume of export shipments ended at higher levels than the overall fi gures of last year. The Signal Ocean Platform data per ship size (as demonstrated in Figure 1) provides a thorough picture for the evolution of shipments that supported the euphoria of freight rates with Capesize and Supramax ship sizes driving the growth.

The January - June period ended with the monthly average volume of global exported cargo flows for Capesize and Supramax bulkers exceeding the barrier of 30 million t, and recording a 5% increase compared to the annual shipments of 2020. In the Panamax segment, levels at an average trend of more than 26 million t are seen, up 4% from last year’s total, whereas in the Handysize segment the increase is of a smaller magnitude of 3.5%, at an average fi gure of above 26 million t.

40 2020 Jan-Jun 2021

30

Million tons 20

10

0

Capesize Panamax Supramax Handysize

Figure 1. Signal Ocean Platform data: monthly average export volumes for dry bulkers, per ship size, 2020 compared to 1H21 volumes.

Figure 2. Signal Ocean Platform data: dry freight market (US$/t) in major trading routes, per ship size, 2020 - 2021.

Figure 3. Signal Ocean Platform data: bulkers sailing in ballast status, per ship size, May - August 2021.

Freight rates

The dynamics of Chinese economy for iron ore, coal, and grain imports, along with the growth of cargo flows spurred a sustained upward freight market sentiment. This evolution of upward monthly movements during 1Q21 and 2Q21was kept during July with an easing of sentiment in the Capesize segment.

Figure 2 plots the performance of market rates (US$/t) for major loading areas of iron ore, coal, and grains towards the Far East from the beginning of 2020 up to now. The upwards trend of freight rates from July 2020 up to July 2021 has been impressive, with Handysize recording the strongest rebound (more than double US$/t rates) compared to larger bulkers, Capesizes.

In the Australia to Far East route, Handysize rates posted 154% y/y increase, whereas in the Supramax segment, ECSA to Far East, rates almost doubled from July 2020. In the Capesize segment, the Brazil to North China route posted the highest point in May and eased during June and July, with 41% y/y growth. In the Panamax segment, rates have more than doubled between July 2020 and July 2021 in the Continent to Far East (up 110% y/y), which reflects the shifting trend that was detailed at the beginning of this year for the change of origin for Chinese coal imports.

Ballasters' view

The trend of ballast seagoing dry bulkers kept easing during 2Q21 with higher volatility during July, when freight rates started a short-term declining trend. However, fi gures started to fall in the fi rst days of August, indicating that demand for seaborne transportation is still there to absorb the surplus of ship capacity. This could indicate that the seasonal slowing down of freight market sentiment may not necessarily be experienced.

Figure 3 indicates that the number of seagoing Capesizes in ballast remained around 540 ships between

Figure 4. Signal Ocean Platform data: bulkers average laden speed, per ship size, 2021. May and July, with levels falling nearer to 500 ships at the beginning of August.

In the Panamax segment, the average trend of July for seagoing ballasters nearly exceeded 800 ships, however, the beginning of August signalled a decreased number of ships, below the barrier of 800. In the Supramax segment, July also brought accelerated pace with an average number of 750 ballasters, whereas in the Handysize segment, July kept lower levels than 700 ballasters, which underlined stronger freight rates compared to the Supramax and Panamax segment. August started with around 650 Handysize bulkers sailing in ballast.

Overall, the beginning of the fi rst week of August brought steep declines in the number of ballasters for the main bulker ship sizes compared to end-July levels. However, seagoing Supramax bulkers appear to be at 40 ships lower than the beginning of January. Ballasters’ view confi rmed the strongest performance of market rates US$/t during 2Q21, and although an over performance in the Handysize segment between July 2020 and today was experienced, the fi gures of seagoing bulkers in ballast in the fi rst days of August imply that Supramax ships bear more potential for a noticeable upward correction of freight rates in 3Q21. Nevertheless, it is worth noting that the Chinese economy will continue to fuel optimism in the freight market sentiment for larger bulkers such as Capesize and Panamax.

Laden speed

As a reflection of the positive freight market movements and optimistic expectations for a sustained recovery in the coming months, the fluctuation of the laden speed per bulker size since the beginning of the year has been examined, as seen in Figure 4. The results show an increasing trend among all sizes that implies the fi rm willingness of ship owners to absorb the positive fluctuations of freight rates and decrease the number of sailing days in ballast status by securing the most profi table employment for the ships with voyage optimisation.

In Figure 4, it is clear that the higher trend of average laden speed has been recorded in the Handysize segment at levels near to 11.7 knots, compared to the lowest point of 11 knots at the end of January. The average laden speed of Handysize bulkers follow almost the same pattern of Supramax, with higher indications at the end of July. In larger ship sizes, Capesizes posted an accelerated trend above the average laden speed of Panamax bulkers during the period of May - June at levels of approximately 11.4 - 11.5 knots. July ended with higher levels of laden speed for Panamax bulkers as it seemed that the easing trend of Capesize freight rates diminished the need for increased sailing speed.

Conclusion

The dry bulk market seems well supported by vessel demand due to strong Chinese economic activity and infrastructure plans after COVID-19. The question now is how will supply respond, also taking into consideration the relatively modest fleet growth that is planned over the coming period. Could the relatively high levels of congestion and delays at key port hubs underline further the upward trend of freight rates? The current trends offer signs of a declining number of ballast ships and this could continue triggering an upward curve of freight rates. It remains to be seen whether 2H21 will bring the same fi rm level of freight market rates US$/t as of 1H21, however, there is always a summer lull that may cause downward direction in the short-term.