Dry Bulk Freight Market: A short term dawn just ahead?

After the recent, though weak, rise in freight rates, let’s see where freight rates are now relative to the low levels of Q1 and what we expect over the next few months.

Economy

JPMorgan’s Global All-Industry Output Index dropped to 54.2 in April, signaling that global economy, while slowing is maintaining a solid rate of expansion. Although new orders strengthened, global manufacturing activity was slowest in 2 years.

In the past six years China has contributed about 40\% of total world GDP growth, and while over the next six years that contribution is expected to be less (about 27\%) it is still largest contributor, by a large amount. So while GDP growth was 12\% when its GDP was US$4B annually, 7\% of a larger US$10B economy is still massive. While India is set to be fastest growing major economy through 2020, its size and contribution pales in comparison to China.

The PBoC cut interest rates for third time in six months this week to counter a slowing economy. One year lending rates were lowered another 0.25\% to 5.10\%. The RRR was also cut 0.5\% in early March and was recently cut another 1\%. The 2 cuts frees up US$300B for lending. However, rate cuts don’t address the real problem.

Freight Rates

As we had forecast, the freight market reached a new low point in mid-February, driven down in all sizes and in both basins. A late Brazilian grain harvest, and easing port congestion did not help the supply/demand balance. Falling Chinese coal imports added considerably to weakness. Since the bottom, rates have increased in all sizes, but overall demand presently remains less than available fleet supply.

Spot rates for handysize and handymaxes have gradually improved since mid-February, although from very low levels. Panamaxes have seen some demand benefit from ECSA grain exports, which started about one month later than last year. Cape earnings are awful, but have improved from a TCE of only US$1000 daily in Pacific a few weeks ago.

Commodities

After peaking in early 2011, non-ferrous metals prices dropped until 1Q14. Partially driven up by nickel, metals prices rose through Jul14 and then turned down again. Except for nickel prices, which have collapsed since Dec14, aluminum and copper appear to have reached a bottom. Grain prices declined from the Aug12 peak to a Sep14 bottom, increased again through Jan15, and are now declining again, driven down by large harvests in South America and USA over past 2 years. Aug12 peak prices versus present spot prices in US$/bushel: corn: 8.50-3.50; soybeans: 17.75-9.25; wheat: 9.50-4.75. Hence, the steady demand for grain by importing nations. Providing the global economy strengthens, low prices for all commodities present a buying opportunity for end users.

Fleet Supply

In a sign of slowing Chinese coal (thermal/met) imports, Australian port congestion dropped to only 95-100 ships at mid-April, down from 130-135 in mid-February and 155-160 late last year. Port congestion has since increased to 130 ships, but loading delays, except at Newcastle, are less. Falling coal exports (-20\% yoy in Q1) has also seen congestion at Indonesian coal ports drop significantly this year, mainly for sub-capes.

Extremely poor earnings, and a pessimistic forward view has led to significantly more scrapping ytd. The age of capesize demolition has averaged of 21 years this year versus 27 years for handysizes. The youngest ships sold for demolition have been 2 panamaxes built in 1998, followed by 5 capes built in 1996 and two in 2000. Even with very high scrapping activity, NB vessel deliveries are still outpacing demolition.

About 37 large capesize ships and VLOC’s totaling 7.3m dwt were delivered through early-May. Most capesize demolitions have been smaller, older capes.

About 65 capesize ships of 10.7m dwt have been scrapped or sold for scrap this year through late May versus 29 during entire 2014 and 70 in 2012. Many more owners are looking to sell older and idled capes for demo. Seventeen capes built 1992-2000, 1 x 211,000 dwt VLOC (1996) and 1 x 310,000 dwt VLOC (1987) were sold for scrap in past three weeks. Chinese owners continue to scrap tonnage at local yards eligible for government subsidies, with several Cosco capes and panamaxes sold in the past few months – though they are also ordering NB’s under subsidies on private terms. March saw dry bulk carrier scrap sales reach 3.7m dwt versus the monthly average of 1.3m dwt/month in 2014.

Interestingly, 2 x 2011 built 320,000 dwt VLOC’s were recently sold for conversion to VLCC’s.

During Jan-Apr, 166 bulkers of 14.2m dwt were scrapped. That equates to 92\% of total 2014 demolitions and could reach 40m dwt this year. The average age has also dropped from 27-28 years last year to about 22 years, reflecting the younger capes and panamaxes being scrapped.

During Jan-Apr, 253 bulkers of 19m dwt were delivered. About 7m dwt of these ships were delayed from 2014. We expect owners to delay NB deliveries as much as possible on those ships that are not close to finishing construction. Through end-April, net dry bulk fleet growth was finally less than 1\% with almost zero growth in the handysize sector. The capesize fleet actually declined !!!

An estimated 70-75 capesize ships, and perhaps more, are idled (anchored and not trading at all) or laid up globally. Another 50-60 are estimated to be anchored and “awaiting orders” in the Atlantic and Pacific.

Of the NB orders placed last year, many owners are negotiating with shipyards to cancel, delay or convert their dry bulk newbuilding orders to tankers. Converting a bulker order to a tanker is not easy, because the yard that builds the bulker must also build tankers and the type the owner wants, and the majority do not. So, converting orders to tankers is not expected to be significant.

Coal – Metallurgical

Benchmark Australian spot metcoal prices have dropped to about US$85/mt FOB as overall import demand has slowed in China and elsewhere in Asia.

Coal – Thermal

Chinese coal output in Jan-Apr was 1,148mt (3.44btpa), down 6\% yoy. China urged local authorities and coal miners to cut output to support the sector, which has been over producing and suffering persistent losses. It will also close small mines this year that produce 78mtpa in total. Production last year fell for the first time in 14 years, dropping 120mt to 3.6bt. Few expect coal demand to recover this year.

China has taken steps to support its coal industry which employees millions.

Domestic miners cut coal prices at QHD to 440 yuan/mt (US$71 including VAT but excluding coastwise freight of US$3.75 to south China) in early May versus Newcastle benchmark coal at US$61.50 FOB (US$82 C&F including VAT). Newcastle coal prices rose from US$54 FOB in mid-April due to storms. Wood Mackenzie says that China’s attempts to restrict imports could widen the gap between domestic and imported coal prices and could “have the unintended consequence of driving up imports in 2H15 as major consumers buy seaborne coal meeting the new restrictions on coal quality.

The Chinese domestic coal market is four times larger than the entire seaborne thermal coal market. International coal miners have cut production significantly, but are unable to influence prices because of China’s domestic coal surplus. Chinese miners are also offering discounts of US$2-4/mt to contract customers that purchase additional spot volumes. Coal production cuts outside China have been offset by a corresponding decline in Chinese imports this year. China’s share of seaborne thermal coal market is expected to decline from 17\% in 2014 to 12\% this year and fall further next year.

Total Chinese coal imports:

2015 2014

Q1 49.1 (196mtpa) 83.9 (336mtpa)

16.3mt/month 28mt/month

∆ = 12mt/month

Indonesia – south China = 25 days and at $5/mt = $1250/day on 58000 dwt handymax
Newcastle – south China = 40 days and at $9/mt = $4000/day on 82000 dwt panamax

China’s coal imports in 1Q15 fell 42\% yoy, reaching only 49.1mt, including lignite. Imports were running at 196mtpa or a yoy reduction of 12mt/month.

Total Chinese coal imports fell 26\% yoy in April, extending the sharp slowdown seen in Q1. Demand for thermal coal is weak and domestic supplies can easily meet demand. April imports were 19.6mt, down from 27.1mt in Apr14. However, they were up from 17mt in March because the price of imported coal collapsed in March. May imports will be interesting, because imported prices rose during April.

China’s total power output rose 3.2\% in 2014, weakest growth rate in 16 years. Power generation, an important barometer of economic activity, was up 1\% yoy in April. Output from thermal power, mainly coal, fell 9\% yoy in March and fell 2.8\% in April while hydropower generation rose 15\%. Hydro output reaches a peak during June-Sep/Oct. Power prices to businesses were recently lowered to ease costs on energy intensive industries like aluminum smelting and steel production.

Of interest is that March cement production (mainly coal-fired) was down 20\% yoy and glass production fell 7\%.

The decrease in power generation at some of our power plants compared with same period last year was attributable to the following: 1) in 1Q15, the slowing economy, caused a continued decline in nationwide power consumption; 2) the startup of a number of UHV west-to-east power transmission lines.

Japanese thermal coal imports were up slightly to 9.5mt in March or 114mtpa versus the 110mt imported last year. LNG imports also increased about 1.5\% to 90mtpa. South Korea’s thermal coal imports were 7.4mt in March, falling 12\% mom with Q1 imports of 23.1mt (92mtpa), about flat on last years total.

The price of spot Asian LNG for June delivery has fallen to US$6.85/mbtu, down 25\% this year. Delivered price to Europe has dropped to about US$6.50/mbtu.

The Kagoshima District Court dismissed an injunction to block the restart of two nuclear reactors (Sendai plants), brushing aside the safety concerns of local residents. While the decision clears another hurdle for the reactors to restart as early as July, residents have appealed the decision.

A Japanese court just issued an order blocking the restart of two nuclear reactors at Takahama and said the safety standards were too lax, a major setback to restarting nuclear plants. Two reactors at Kansai slated to restart in 3Q15 also just had a court uphold an injunction against restarting. While all 4 reactors have met all new safety regulations, local residents say they are not yet safe enough against potential earth quakes.

EU thermal coal imports have been weak so far this year due to a warm winter. The UK almost doubled its carbon tax on April 1.

India Thermal Coal

Indian coal-fired power plants should increase imports through June, ahead of monsoons. Port congestion has remained about steady over the past few months with most coal ports seeing 2-4 days in berthing delays with a few having 6-8 days waiting time. Several coal-fired plants came online in 4Q14 and 1Q15, thus coal imports are expected to increase further. Total coal imports in April were 21mt versus 24mt (288mtpa) in March.

Due to royalties and local levies on domestic coal mining, imported high CV coal is presently … remainder for subscribers.

Steel

2014-09-23
World crude steel production contracted 1.4\% yoy in April to 137mt or 1,647mtpa and was down from 1,668mtpa in February. Output continued to fall yoy in Japan (-6\% to 8.4mt) and South Korea (-7\% to 5.8mt). Chinese output was flat at 68.9mt or 838mtpa, but was up from 807mtpa in February and the highest since Nov14 when output was 770mtpa. Elsewhere in Asia, India saw growth reach 90mtpa. US steel output continued to weaken, falling 10\% to 6.5mt, while production in the EU28 was flat on last year at 14.4mt. German crude steel output rose to a ten-month high of 3.6mt. Global steel use should grow slightly slower this year than last year because of China’s slowdown, although elsewhere steel use is mostly improving and 2016 prospects look brighter. We hear about increasingly positive use from developed economies, especially the euro zone. In the developing world we see increased optimism from India and growth in the MENA and ASEAN countries.

Global pig iron production, at 1,183btpa in April, was down 1\% yoy, and about flat on last years total output of 1,181bt. Chinese pig iron output was about flat on last year at 724mtpa. Production since the Jun14 peak in global output (in mtpa): China -6; India: +4; Japan: -5; South Korea: -2 and EU: +2mt with Germany: +2.

China produced crude steel at 807mtpa in February, 818mtpa in March and 838mtpa in April. Pig iron production increased from 709mtpa in March to 724mtpa in April. End-user demand in northern China has recovered since mid-March due to warmer weather, and continued growing during April.

The above graph is spot price of Shanghai rebar. The most traded steel futures contract on SHFE is Oct15 rebar, which had risen from a low of 2260 yuan to 2456 yuan (US$396/mt) in early May but has since dropped to 2321 yuan or US$374/mt. World average is about US$480/mt.

China’s steel exports will remain very competitive this year. Firm export demand has partly offset the cancellation of an export tax rebate on boron added steel products. However, steel mills can … remainder for subscribers. After exporting 94mt last year, China exported 25.8mt of steel in Q1. April exports were 8.5mt or 103mtpa.

China’s steel consumption fell 3.5\% last year and is forecast decline another 4-6\% this year. Falling new building construction starts raises concerns about weakness in demand for other commodities, including aluminum and copper used in pipes, wiring, white goods and other related demand. Beijing has recently cut interest rates and the RRR again to spur growth and has eased rules on purchasing property. Recent measures to stimulate growth should have some positive effect, and it may improve steel demand, though not significantly.

In Jan-Apr15, Chinese floor space under construction was 5,996m sqmtrs, up 6.2\% on same period last year. Floor space started was 358m sqmtrs, down 17.3\% on 2014 period. Land area purchased by real estate developers was 55m sqmtrs, a 33\% decrease from Jan-Apr 2014.

China will invest more than CNY 1.6T on infrastructure this year to assist economic growth and ease the burden of rising debt costs.

With winter now over, construction activity is expected to resume in China during Q2, leading to higher steel demand … although this has yet to materialize. Stimulus measures, such as interest rate cuts and government infrastructure investments have been implemented. If domestic demand in Q2 picks up, steel prices may have bottomed in April.

Indian steel consumption rose 7\% yoy in April to 5.5mt or 66mtpa. Steel production was 83mt in 2014 and running at 90mtpa in April.

Iron Ore

Cheap imported iron ore saw China’s imports average just under 78mt/month last year and reach 933mt. Imports this year have been; Jan: 78.6mt; Feb: 68mt; Mar: 80.5mt and Apr: 80.2mt for an average 76.8mt/month, about flat on last year at this time. April imports were 962mtpa. Iron ore imports usually drop in Jan-Feb and recover during Q2.

Iron ore imports as a proportion of steel production have been increasing with the ratio last year about 1.13 tons of imported ore for each ton of steel produced.

All of the above assumes only Australia and Brazil increase exports to China this year, which is likely. Ukraine exported 14.8mt of iron ore in Jan-Apr, +14\% yoy as the weaker ruble helped their competitiveness. China accounted for 45\% of the total. Some mines in Canada, Chile and West Africa have closed due to low ore prices. Iranian exports, mainly to China and mainly shipped on pmax/smax dropped 1mt yoy in April to 0.4mt. Malaysian exports, mainly handysize cargoes, have almost ceased this year.

Last year China imported 549mt of iron ore from Australia out of 717mt total exports. Imports from Brazil were 171mt out of 340mt total exports. Imports were 213mt from elsewhere. Australia had a 59\% market share of Chinese imports; Brazil had 18\% and Africa, including West Africa, had 8.6\% or 80mt (CISA 04/06/15)

Chinese Jan-Apr 2015 iron ore imports (mt) by source and market share (\%):

In Q1, Brazil did not suffer from adverse weather of previous years, which, when combined with new mining capacity coming online, permitted production and exports to increase. Vale produced 74.5mt of iron ore during 1Q15, up 5\% from last year. Brazilian iron ore exports in April were 28.7mt, up from 24.7mt in Apr14. Jan-Apr totaled 108.1mt, up 12\% on last year.

The loss of some Canadian, Chilean, West African (Sierra Leone + Liberia) and Mexican iron ore shipments to Asia in Q1 offset rising long haul Brazilian ore exports.

Chinese iron ore output fell 12\% yoy in Jan-Apr to 384mt (1152mtpa). April production was 104mt (1250mtpa) versus a total of 1465mt last year. Iron ore output slows considerably during the winter as northern mines close, and due to falling prices since January, many have not reopened. It will be interesting to see output later in Q2. An estimated 40\% of domestic ore mines have closed, mainly smaller and lower quality, while larger, more efficient mines with higher FE content have remained open.

Although the price premium for higher grade iron ore has increased recently, it remains far less than at this time last year. Thus, to cut production costs and pollution, many mills are starting to consume higher FE iron ore, including the consumption of domestic concentrates … remainder for subscribers. This is where Brazil enters the picture with their rising production of high grade iron ore.

China will subsidize domestic iron ore production to maintain some self-sufficiency. The resource tax on domestic iron ore was cut from 80\% to 40\% on May 1. This tax cut will save most miners US$2.00-4.00/mt, hence its impact, while useful, will be negligible. However, China is also considering further subsidies for the iron ore mining industry, including a cut in the 17\% VAT. In early May, domestic 66\% concentrate prices dropped to US$87/mt including VAT delivered to steel mills versus 62\% imported ore fines rising US$15 to US$62/mt basis C&F to Tianjin, or US$71/mt including VAT. The price spread between imports and domestic concentrates has now narrowed back to normal levels of US$15-20/mt.

Chinese steel mills have destocked ore in recent weeks, especially higher FE ores. Iron ore inventories held by steel mills have not been above 30 days in 2 years and dropped to 23 days in early May, lower than the bottom of previous destocking cycles. Port stockpiles, presently about 83mt, are down from 98mt several weeks ago.

Since the end of annual contract pricing for iron ore in 2010, iron ore prices have become more volatile. In October 2013, iron ore futures trading began on China’s Dalian Commodity Exchange (DCE) and led to greater speculative involvement. A futures market needs to be backed by an inventory of physical material. It is believed that the build-up of Chinese port stocks in late 2013 (stocks rose from 67mt to 113mt in 6 months) and the extent of the price slide since early 2014 might reflect the influence of the DCE futures market.

Global iron ore miners were helpless last month as Chinese speculators first bought and then sold a record volume of iron ore futures on the DCE, sending global prices on a roller-coaster ride. The volume of iron ore futures traded on the DCE reached 18.6 million contracts in April (100mt/contract), the equivalent of 1.86 billion tonnes of iron ore, or about 1.5 times annual seaborne trade !!!

Another 60-80mt of global supply is coming online during 2H15 and should lead to lower iron ore prices later this year, and perhaps a retest of the early April low of US$46.70.

Grain

July soybean futures appear to have stabilized at recent low levels near US$9.25/bshl with speculation the price slide will stimulate imports by China and others. For July delivery, corn futures are now US$3.50/bushel and wheat is US$4.75/bushel with all grains at very low prices, though not as low as late Sep14. Brazil’s corn and soybean harvest was 4-6 weeks behind last years early harvest and stronger exports finally started in mid-April following disruptions from a truckers strike in February and March. Argentina’s harvest is ahead of last year and larger export volumes should commence by early June.

Even with weak soymeal feed demand in parts of China, the price of imported soybeans has fallen much more than prices of domestic soyoil and soymeal in recent weeks. It also appears that most “commodity financing buyers” that purchase soybeans for credit exited from the market late last year and may explain why soybean prices have dropped since January. A lack of commodity financing buyers may also reduce the usual Q2 ECSA soybean purchasing activity that was evident during the past 2 export seasons. China’s soybean imports are still expected to reach 74-76mt this year, up from 70.8mt last year, with large ECSA purchases.

The labor situation in Argentina is very chaotic due to estimated inflation of 30\%, or more, and it may get worse. Strikes and work stoppages are happening across all industries with workers asking for 30-45\% wage increases and most companies only willing 15-25\%.

Other

Log shipments within the Pacific have slowed this year due to falling Chinese and Japanese construction. The weakening yen has also reduced imports of plywood. Agricultural exports from India have also slowed down, mainly effecting handies, and some of this has been partially replaced by longer haul exports from the Black Sea. SE Asia rice exports within ASEAN and to Africa (mainly handysize) as well as cement and fertilizer (handysize and handymax) have remained steady. Chinese steel exports have provided good handy-handymax cargo demand. After declining 3mt/month in Jan-Feb, exports have reached new record levels.

Although slightly weaker than last year, minor bulk demand (excluding bauxite and nickel ore) has remained fairly resilient, providing some support for handies. However, we see considerably more mini-bulkers of 8,000-18,000 dwt open in Asia than is the usual case when cargo demand is stronger. In fact they are spread out all over north and south east Asia.

China imported 4.4mt of bauxite in March, up from 3mt in February. In order of suppliers, Malaysia was 1st, India 2nd and Australia 3rd. Stockpiles of imported bauxite built up in 2013, before Indonesian export ban, are running out.

Chinese inventories of Indonesian nickel ore were very high in early 2014 after record 2013 imports. This inventory will run down.

General Market Forecast for next 8-12 weeks

The lowest freight rates of the last 30 years occurred in February … usually the worst month of each year, and perhaps the low point in earnings this year. Global steel production has not collapsed. Australian iron ore exports have increased substantially while Brazilian exports, until recently, were basically flat. However, some long haul Atlantic-Pacific cargo volumes have been lost. 1Q15 coal and grin volumes were down, but we expect Q2 cargo demand should improve in all sizes after a disastrous 1st quarter. The fleet is growing, even with high demolition, but idle ships have artificially reduced fleet supply, especially in the capesize sector.

This year will test the balance sheets of all dry bulk shipping groups, and may see some larger shipping companies collapse as cash is drained due to very low earnings and negative cash-flow. Risk management will be extremely important, especially because even some of the biggest charterers are renegotiating expensive period chartered ships.

Demolition together with idle and laid up tonnage, especially capes, has led to less fleet supply while Q2 demand is expected to increase. Effects will be short lived if idle ships return to trading.

Traders and mills were caught short on the recent iron ore price hike, the same thing that happened at this time last year, just before cape rates picked up.

With Chinese iron ore and some metcoal restocking in Q2, but otherwise basically steady global steel output, we expect the BCI to increase.

As rates rise we expect idled tonnage to start trading again by late June or July. This will not help rates rise from the ashes. The El Nino weather pattern needs to be closely watched because it has the potential to dramatically increase cargo demand later this year.
Source: Seatrade Ltd., on arrangement with Hellenic Shipping News Worldwide