Commodity boom pushes bulk shipping costs to record highs
Tariffs for ships carrying goods that power global industries and keep the world fed have skyrocketed, raising hopes of a turnaround in fortunes for the besieged dry bulk shipping industry.
China’s strong demand for iron ore, a key ingredient in steel, the resurgence of manufacturing in the rest of the world, and underinvestment in new ships in recent years have led to a sharp increase in bulk carrier prices. dry, which transport unpackaged raw products. materials in large holds.
The Baltic Dry Index, which tracks the rates of the three largest classes of ships, reached its highest level in more than a decade, exceeding 700% since April 2020. Capesize ships, the largest type with an average capacity of 180,000 deadweight tons, brings in $ 41,500 a day for immediate rental, nearly double from a month ago and nearly eight times the average of last year, according to Clarksons Platou Securities.
“China’s insatiable appetite for iron ore has been the biggest factor,” said Ulrik Uhrenfeldt Andersen, managing director of Golden Ocean, the largest listed owner of capesize ships.
Iron ore, a crucial source of profit for some of the world’s largest miners, hit a record high of nearly $ 230 a tonne this week as Chinese steel mills ramped up production to make the most of high domestic prices.
This follows the introduction of production brakes in Tangshan, China’s largest steel town, as part of a pollution crackdown. However, the move only served to reduce capacity and drive up domestic prices, something factories in other parts of the country grabbed hold of.
A host of other factors have helped tighten the shipping market, from record exports of U.S. coarse grains to the trade dispute between China and Australia, which has tied up ships with coal and other materials outside of the United States. ports of the world’s largest importer of commodities.
“The stars are in line for dry bulk,” said Lasse Kristoffesen, managing director of Norwegian haulier Torvald Klaveness.
The sector has been plagued by overcapacity of vessels since the 2008-9 financial crisis, despite strong growth in demand for raw materials. The pandemic-induced downturn in commodity markets last year contributed to the misery, but growing demand for raw materials as the world recovers has helped transform dry bulk fortunes.
“For all major freight shipments, it’s been a lost decade,” Kristofessen said. “The market has been depressed and the returns have not been sufficient, largely due to the fact that we are ordering ships as if there is no tomorrow. It took 10 years to get that out of the system. “
The industry is confident that prices will continue to rise this year. Petter Haugen, analyst at Kepler Cheuvreux, said it is possible that capesize ships will make $ 100,000 a day in the second half of the year.
Analysts have cited fiscal policies aimed at stimulating economic growth, the clamor to restock depleted stocks and the moderate supply of new ships as supporting higher prices.
But the industry is divided over whether the rally will solidify into a more lasting trend. Soaring prices across a wide range of commodity markets have prompted talk of a supercycle – an extended period of high prices – as major economies pull all cylinders. This has sparked speculation as to whether there will be a spillover effect for dry bulk transport.
Joakim Hannisdahl, head of research at Cleaves Securities, said a long period of price growth seemed more likely each month for owners to delay purchasing lots of new vessels.
“As long as we don’t get a new ‘black swan’ on the demand side, then this could be a supercycle that people will remember for the rest of their lives,” he said, referring to unexpected events having a significant impact like the pandemic.
A surge in container shipping markets compared to the fall of last year, which preceded the dry bulk carrier rally, sparked a surge of orders for shipyards, delaying the delivery date for bulk carriers ordered now.
“The yards fill up quickly with orders for non-bulk carriers,” said Edward Buttery, general manager of Taylor Maritime, owner of small carriers. His company is gearing up for a rare maritime listing in London as institutional investor interest in shipping is rekindled.
Some owners are hoping for more favorable winds, pointing to currently being debated global regulations that could force ships to slow down to reduce carbon emissions from 2023, which would limit fleet availability.
“Another catalyst is that by 2023 new regulations on ship design and emissions are expected to be introduced. About 75% of the dry fleet would not comply with the new regulations, ”said Andersen.
But skeptics have said the key missing ingredient for a supercycle is the lack of a supporting force like the rise of China, which led to the last period of high prices and whose imports are now close to half of the dry bulk transport market.
Environmental pressures also weigh heavily. If China is serious about reducing its emissions and steel production, analysts say restrictions like Tangshan’s will need to be rolled out in other regions. The outlook looks even bleaker for coal used in power generation, which accounts for nearly 20 percent of dry bulk ocean shipments.
“This decade will see thermal coal in decline,” said Peter Sand, chief shipping analyst at shipowner trade organization Bimco. “There are more obstacles on the horizon when it comes to climate change and dry bulk transport.”
He added that prices – which are still only around a third of 2007 levels – would likely decline as there is still excess vessel capacity.
“I see this as a rare off-season event. . . there are underlying factors that define a certain level of severity, ”he said. But he added “what not to like about dry bulk transport right now”.