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Highlights

High iron ore prices spur vessel demand

But Pacific coal demand remains subdued

Grain could provide another pocket of demand

Singapore — Pockets of strength are expected across dry bulk markets in the third quarter, while freight rates face headwinds from a potential drop in demand due a second wave of COVID-19 infections emerging across the globe.

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Freight rates across all dry bulk segments recovered from the lows seen earlier in the year to reach year-to-date highs in the first half of July.

Platts Cape T4 index basis 0.5% sulfur marine fuel hit a year-to-date high at $31,901/d July 6, surging 15-fold from $2,075/d on May 14. Similarly, the Kmax 9 Index basis 0.5% sulfur marine fuel reached $12,801/d on July 9, the highest since the index was launched on May 4. Returns for Kamsarmax vessels were around 16% of that level at $2,000/d in February.

IRON ORE SPURS DEMAND

Market players said signs of improvement in the macroeconomic environment, especially in China, and robust iron ore prices had spurred iron ore miners to maximize throughput, in turn creating more shipping demand.

Brazilian mining major Vale has maintained its iron ore production guidance for 2020 at 310 million-330 million mt despite the COVID-19-led closure of its Itabira complex in early June.

According to Platts trade-flow software cFlow, Vale's exports from Brazilian ports totaled 116 million mt in the first half 2020. This means Vale would need to export at least 194 million mt in H2 to meet its target.

Australia, Canada, South Africa and India also continue to take advantage of strong iron ore prices and are exporting high volumes at present.

India in particular saw a surge in exports of iron ore fines and pellets in Q1, providing strength to the Supramax segment. India exported 8,241,157 mt of Indian iron ore fines and pellets to China in Q1, surging from 3,583,948 mt in the same period a year earlier, China customs data showed.

Multiple shipping market sources said this kind of demand from Indian exports was the strongest in almost a decade.

Against a backdrop of lower coal imports into India, this increased demand has resulted in vessels finding encouragement to ballast, even from Southeast Asia.

PACIFIC COAL DEMAND SUBDUED

Thermal coal prices for major producers in Australia, Indonesia and South Africa have been sliding since the start of the year amid poor demand from major importers India and China.

Current spot prices were close to the marginal cost of production and output was expected to fall as prices slipped below breakeven for some miners, coal analyst sources said.

Seaborne thermal coal volumes were expected to contract by around 100 million mt in 2020 from the year before, market sources said.

India's power demand plunged during nationwide lockdown measures imposed in March and market participants expect demand to recover slowly as the country continues to grapple with outbreaks.

Import quota limitations at Chinese ports have also dampened trading activity.

VESSEL DELAYS, GRAIN DEMAND

Market sources reported long waiting times at Chinese ports toward the end of Q2 due to severe weather and slower customs clearance. This held back vessels from the market, reducing supply, albeit temporarily.

Crew changing issues were harder to execute due to COVID-19 restrictions and detentions and deviations were witnessed, which disrupted ship schedules and also reduced tonnage capacity, thus pushing up the freight rates in the Pacific.

"Now the AMSA [Australian Maritime Safety Authority] advises that ships with crew on board for more than 11-14 months will be detained," a Capesize ship operator said, adding this issue would continue to be a swing factor in the Pacific.

More favorable developments were expected in the Black Sea in Q3. "Russia has had an export ban on its grains since May and the lifting of the ban in July during their harvest will result in a surge in vessel demand," a ship-operator source said. Vessels in the Indian Ocean will see the lion's share of the demand in the Asia-Pacific, the source added.

Even at the start of July, multiple Ultramax vessels were heard fixed around $22,000/d passing Canakkale for a trip via Black Sea to the Far East, prompting vessels opening on west coast India to ballast.

The time charter equivalent rate for Supramax vessels delivered at Canakkale for a trip via the Black Sea to Southeast Asia averaged $12,512 in June and $12,299/d in May.

However market sources expressed concern over the supply of soybeans from Brazil in Q3, as almost 90% of the previous harvest has reportedly already been sold.

With the start of the US grains harvest in Q3, market participants also remain uncertain whether political tensions between the US and China will impact China's commitment to its Phase 1 trade deal with the US, and hence its soybean purchases.

"Most traders are just watching now as buying US soybeans is very political with the backdrop of the trade war. We will have to see how [Chinese] state-owned companies behave first," a shipbroker source said.