2022 is expected to end on a quiet note in the dry bulk market, according to Mark Nugent, senior freight & commodities analyst at London shipbroker Braemar. A shift in the coal trades following EU sanctions against Russia offers support but the key iron ore trade into China remains lacklustre, he explains.[ds_preview]
The last few months were a very mixed bag in the dry bulk market, can we expect a year-end rally?
Mark Nugent: No, we don’t think so. The worsening global economic outlook and high energy prices have driven a widespread industrial slowdown, with several of these primary industries being large consumers of bulk materials, such as iron ore in steelmaking.
The largest demand driver, China, still shows contractions across almost all indicators related to its construction and property sectors as stimulus policies are yet to have a material impact on its economy. Further, the stop-start nature of the zero-Covid policy continues to weigh on demand, capping any rebound in activity.
On the larger vessels, seasonal headwinds also emerge in Q4. As the rainy season begins in Brazil, we expect its iron ore exports to decline, driving more demand from West Australia, a much more efficient route to China.
While there are several macro headwinds at play in the dry bulk market, rates remain at healthy levels, averaging in the mid-high teens across all segments. We expect continued support from coal and grain trades.
With Europe heading into recession and growth in China perhaps picking up, how are trade routes going to be affected? Will we some rebalancing?
Nugent: In Europe, we have started to see the effects of sanctions on traditional bulk shipping routes, particularly in relation to coal. In the 12 months prior to the import ban, EU countries imported 3.2 mill. t of coal per month from Russia on average, with power utilities now forced to look elsewhere. Coal from as far as Australia and Indonesia made its way to Europe plus more buying from the USA, Colombia and South Africa. This has translated into more demand for capesizes due to their greater cargo capacity and the lengthier distances involved.
Russian coal is finding new destinations post-ban. Exports to India and China increased by 110 % and 23 % year-on-year to 1.5 mill. and 5.3 mill. t in September, a trend we expect to continue.
The tonnage side is in flux: congestion easing up but new constraints on productivity emerging with CII/EEXI. How will it all pan out?
Nugent: With regards to the upcoming regulation, we don’t anticipate dramatic changes to productivity. The dry bulk fleet already operates at slower »eco-speed«, thus it is less likely that any sort of speed reduction will be required next year for the large majority of the fleet.
There are still several unknowns surrounding the CII regulation, which is keeping many from making operational changes as of yet. As emissions regulations tighten in the years to follow, this is when we expect a more considerable impact on the market. As positive CII scores get more difficult to attain, vessels will be forced to make greater operational changes.
Interview: Michael Hollmann
