Shipping market outlook—Container vs dry bulk: First-quarter 2023 update

After returning to the pre-pandemic level, dry bulk freight rates may recover with mainland China's easing "zero-COVID" policy in the medium term and limited active supply in the long term, while container freight rates are expected to decline further with reduced congestion and heavy investment in new buildings.

Key findings

• After historic boom period over the pandemic era, recent average earning of containers and dry bulkers started to deviate below the long-term earnings trend as heavy congestion has declined with lower import demand and the easing of supply-chain issues.
• We expect supply normalization with about 2% fleet growth annually in the next few years will help the dry bulk market to recover, while a large amount of scheduled newbuilding deliveries of container vessel capacity with reduced port congestion would put the container freight rates under further pressure.
• Container is expected to face supply-side pressure with heavy investment in new buildings. Newbuilding contracts in 2021 reached the highest since 2015 mainly owing to container vessels and will keep major shipyards occupied until at least 2024 (some into 2025). Fresh contracts were limited in 2022 in other sectors, including dry bulk and tanker with high prices and limited capacity in major yards; many owners triggered the options of existing contracts with lower contract prices.
• With limited orderbook, annual dry bulk fleet growth will slow to 2.8% in 2022, 2.5% in 2023, and 2.1% in 2024, compared with 3.4% in 2021, while container fleet growth will increase to 7.3% in 2023 and 8.0% in 2024, downgraded from previous expectation with higher scrap and slippage owing to reduced earning expectation.
• It is unlikely to see major regulation impact in speed and demolition in the near term with a lack of scrap candidates and transitional phase of the regulations. However, in the medium term, with lack of investment in alternative fuel, regulation-related additional costs (CII, EU ETS, etc.) with increasing over-age capacity may boost scrap activities and reduce sailing speed to meet the requirements of regulations or save the fuel cost, specifically after 2025.

Dry bulk market

Since discussed in the last edition, over the last three months, our dry bulk freight forecasting models continued to show bearish view for early 2023 and bullish view for the second half of 2023 onward. Interestingly, we observed a volatile path to lower rates over the past few months in the absence of high congestion and slower-than-expected economic growth with continued weakness in mainland China's real estate sector. However, deferred contract of FFA, specifically, assessments for the second half of 2023 onward have been well-supported with mainland China's policy shifting toward supporting economic growth. As of writing (March 7, 2023), sentiments changed rapidly as many expect that major change in mainland China's "zero-COVID" policy would eventually improve the fundamental. We maintain our positive view in the medium term (first half 2023 onward) but remain cautious on very near term, mostly Q2 2023 for dry bulk market.

Container versus dry bulk

As we predicted, with weaker influence from the container sector to minor trade and backhaul rates of the smaller-geared bulker market, the historical earning spread of Panamax and Supramax returned to normal. Furthermore, with significant drop in container freight and slower container trade demand growth in response to high inflation rate and endemic consumer pattern along with reduced congestion, decontainerized trend has been reversed and large part of container spillover-related minor bulk cargo have already returned to container box.

However, dry bulk freight rates have also declined along with box rates, which may limit further containerization. Further downside risks on minor bulk demand remains toward the end of 2023 and 2024 as container sector is expected to face continued supply-side pressure with heavy investment in new buildings. Now, we assume container freight rates will continue to decline to pre-pandemic level.

Regulations and energy transition impact

With EEXI—design requirement for existing ships—many vessels go for engine power limitation (EPL). Maximum and operating speed are expected to be reduced; however, immediate impact will be limited as fleet speed has already slowed down with lower freight rates and higher bunker fuel prices.

CII rating is calculated as CO₂ emitted per cargo-carrying capacity and nautical mile; this may increase ballasting voyage and reduce cargo intake. CII regulation will start to reduce sailing speed from 2024 and the impact may become significant in scrap activities from 2025 onward with favorable age profile. However, this also incentivizes higher demurrage to reduce idling time and congestion in the coming years.

Theoretically, EU ETS may cost shipping companies an additional €100-300 per 1 VLSFO metric ton based on an estimated CO₂ price of € 60-100/metric ton of CO₂, which could be passed on to customers through higher freight rates. The ETS will apply to 100% of emissions on voyages between European ports and 50% of emissions on inbound and outbound voyages. Shipping companies that do not comply with the ETS will be fined €100 for each EUA as penalties.

Although methanol (green) started to gain attention recently, mostly from container sector, gas has been the preferred choice for alternative fuel including dry bulk sector, while conventional LSFO-HSFO with scrubbers are still the dominant type for dry bulkers.

Outlook

In this context, S&P Global Freight Rate Forecast (FRF) models predict the Baltic Dry Index (BDI) to rebound from average 800 points in the first two months of 2023 to average about 1,400-1,600 points in 2023-24, while we assume container freight rates will continue to decline to average about $1,000-2,000 per box (FEU) in 2023-24 from an average of about $7,000 FEU in 2021-22, based on below assumptions.

• Although mainland China's service sector and industrial production will recover earlier than market consensus, business and consumer confidence is likely to recover gradually. We expect mainland China's demand of steel and iron ore to have stable growth from 2023 onward. Therefore, Capesize is expected to return to the highest earning segment in 2023 with recovery in demand from mainland China and normalizing minor bulk and backhaul demand for smaller segments.
• Also, the conflict in Ukraine will continue without major escalation through at least early summer, and economic sanctions and voluntary embargoes will remain.
• Finally, bills of lading data indicated that container spill over impact in geared bulk and general cargo market or reversed decontainerization trend has almost finished with significant drop in container freight rates. We do not expect additional containerization on traditional dry bulk cargo, although the risk remains if box freight rates decrease more than expected with another round of war on market share, which happened in 2015-16.

This is part of S&P Global Commodity Insights Freight Rate Forecast(FRF) service and its quarterly freight outlook report (174p). If you are interested in the full report and subscription please contact daejin.lee@spglobal.com orphoebus.kaloudis@spglobal.com

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.