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SHIPPING Q1: Dry bulk freight market's surprise strength extends into Q2

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SHIPPING Q1: Dry bulk freight market's surprise strength extends into Q2

Highlights

Economic recovery spurs inventory rebuilding

Orderbook shrinks, but secondhand market active

Pent-up demand for commodities from grains to coal powered a surprisingly strong recovery in the dry bulk shipping market in the first quarter, with both freight levels and earnings reaching multi-year highs -- and that momentum is continuing in Q2.

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Although uncertainties still loom large due to the global pandemic, many countries are recovering economically and actively rebuilding commodity stockpiles, and expectations are that shipments will increase further in Q2, while freight rates will remain steady.

"I think the Q1 performance [exceeded] everyone's expectations," a Capesize ship-operating source said.

The Capesize market kicked off 2021 on a firm note with Platts Cape T4 index basis 0.5% sulfur marine fuel touching a year-to-date high of $23,908/day on Jan. 12 and averaging $14,367/day over Q1. This far exceeded the $4,377/day averaged in Q1 2020, as well as the year-high at $8,897/day reached on March 31, 2020.

Platts APSI 5 regional Supramax index, which was launched in February, peaked at $24,863/day on March 24 after opening at $10,834/day, and stood at $22,358/day April 12.

The Platts KMAX 9 Panamax index hit a year-to-date high of $28,448/day on March 23 and averaged $18,276/day in Q1.

Robust iron ore prices, grain shipments and ballooning minor bulk demand, along with an imbalance in fleet positioning, firmed the dry freight market in Q1. Interestingly, freight rates started to move first in the smaller ship segments.

The Supramax and Handysize segments saw sharp year-on-year jumps in cargo volumes of 9 million mt and 6.5 million mt respectively in January, while the larger Capesize and Panamax ships saw improvements in the range of 2.5 million mt and less than 1 million mt.

FFA market reflects Q2 optimism

An active freight forward agreement or FFA market is pointing to a stable to firm Q2. Capesize paper market values for May and June jumped to over $28,000/ day April12, which some sources said will help drive up the physical market.

The Panamax and Supramax segments have also seen FFA markets spike this year in tandem with rising liquidity.

A noticable trend in the physical market in Q1 was the rush by charterers to combine smaller cargo stems that typically move on Panamax and Supramax ships into larger Capesize ships, which were trading at a discount to other bulkers.

Less conventional voyages were seen with logs being carried on Capesize ships from Uruguay. Grains were also unusually shipped from Brazil and chrome ore from South Africa on these larger ships.

Brazil iron ore exports rise

Brazilian iron ore miner Vale raising its production guidance to 335 million mt for 2021, up 11.65% from 2020, the market expects shipping volumes from the Atlantic to increase.

The key impact will be when ton-mile demand out of the Atlantic increases from economic recovery outside of China just as the major iron ore importer imposes steel production cuts.

China's major steel-producing city of Tangshan has already imposed restrictions on steel production to combat air pollution. Seven steelmakers have cut production by 50% over March 20-June 30 and by 30% from July 1 to year end. However China customs data shows the country imported 181.5 million mt of iron ore in the first two months of 2021, up 7% year on year.

China's coal consumption for heating over January-February rose 8.1% year on year to 93.85 million mt, according to Platts Analytics. Domestic coal production hit a record high in Q1 while customs data showed the country's coal imports totaled 43.1 million mt over the same period.

Grain trade data was also strong. US corn sales for the 2020-21 season surged to 31.8 million mt from 13.6 million mt the year before, while US soybean sales rose to 6 million mt from 5.1 million mt over the same period, according to industry reports.

Shrinking orderbook

Newbuilding orders in the dry bulk segment fell in 2020 as the pandemic deterred fresh interest. Only around 200 ships were ordered in 2020, well below the 600 averaged over 2010-2019.

The net effect of a limited orderbook and growth in US grain sales paint a rosy picture for small- to mid-sized vessel segments in Q2. However, in the past two weeks freight levels have softened slightly, with the Indian Ocean region proving a weak link for Supramax ships.

A chartering source with a commodity trading company said the freight market on the west coast of India may remain resilient due to a rush to deliver cargoes before the onset of monsoon season in May. "The majority of participants on the Indonesia to India trade route have taken Capesizes, so the tonnage on Supramaxes, which should have ended up on the coasts, has not," the source added.

Secondhand market heats up

A busy secondhand sales and purchase market for dry bulk ships, along with a spurt in period chartering, is pointing to a steady freight market in Q2, market sources said.

Capesize operators and mining majors have snapped up tonnage for one-year periods in the range of $20,000-$25,000/day depending on the quality of ships.

Along with firm spot and period businesses, asset prices have risen, too. Shipbroker Braemar ACM in a report said the spike in the secondhand sales volumes, which began in late 2020, saw a record 214 ships changing hands in Q4 -- a 91% year-on-year increase. The momentum continued into Q1, when 203 transactions were recorded, up 146% on year.