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H1 Outlook: Volatility expected for Asia dry bulk markets in 2019

Singapore — In spite of a depressed fourth quarter in 2018, all segments of the dry bulk freight market saw earnings increase year on year.

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Volatility was the dominant theme for 2018, and the second, third, and fourth quarters saw mercurial freight movements led by a myriad of fundamental and sentimental shifts amid an uncertain second-half of the year.

The US-China trade war, which impacted soybean trade flows; the declaration of force majeure at Guinea's bauxite mines; finicky weather in North Asia and China's hunger for better quality long-haul seaborne iron ore, were the major contributors to the freight market's roller coaster rates.

Looking forward, analysts expect a potential increase in the Chinese demand as it prepares for another round of infrastructure stimulus to reverse its decline over the last two years. However, analysts advise caution as its positive impact on demand could be undermined if trade tensions continue to persist between the US and China.

The earnings on the Capesize vessels perked up during 2018 with time charter equivalent, or TCE assessments for 2018 on the key Port Hedland, Western Australia, to Qingdao, China route averaged $15,157.78/day, an increase of $1,134.56/day or 8.09% compared to the average of $14,023.22/day in 2017, based on S&P Global Platts. Similarly on the Tubarao to Qingdao Capesize route, the 2018 average of $16,062.41/day was higher by $2,296.15/day, an increase of 16.68% year on year, from the average of $13,766.26/day in 2017.

While these rates failed to match the expectations of Robert Bugbee, president of Scorpio Bulkers, and James Marshall, Berge Bulk chief executive, to reach $50,000/day in 2018, voyages such as the Tubarao to Qingdao 170,000 mt (plus/minus 10%) Capesize route recorded a four year high of $27,643/day on August 6, based on Platts data.

PANAMAX AND SUPRAMAX MARKET SENTIMENT POSITIVE

The sub-Capsize market in Asia Pacific also posted higher earnings year on year, with Panamax TCE rates rising 17% and Supramax TCE rates up by 14%, based on Platts data.

The Q4 average of Supramax TCE rates for the Asia Pacific routes was lower than their annual average while the Q4 Panamax TCE rates were similar to their annual average.

Unlike previous years, the correlation between the different dry bulk segments was a lot less over 2018, according to market watchers.

There were some notable trends in the Asia Pacific Supramax market in 2018. Owners, for most part of the year, were discounting the freight rate for trips into west coast India from Southeast Asia, while taking a premium for going into east coast India. On a TCE basis, this difference averaged above $1,000/d in 2018 compared to only $200/day in 2017.

The strength in rates seen on trips out of the Persian Gulf for moving limestone was a major factor that encouraged owners to take voyages into west coast India. The TCE rate for a Supramax vessel opening in west coast India for a trip via the Persian Gulf to east coast India averaged over 2018 at $11,370/day, up 17.40% from 2017.

However, participants are cautious about future limestone demand, given that most of it from is being moved on Panamaxes following the launch of a deeper draft berth at UAE's Mina Saqr port.

The sentiment is optimistic for Panamax markets in 2019 following recent developments in the trade discussions between China and the US. With more US grain volume expected to flow into China in 2019, market sources pointed out that the Panamax freight forward derivative rates for Q1 and Q2 were almost at similar levels now, whereas traditionally Q1 is at a discount to Q2 rates.

In the thermal coal markets, demand was sporadic in 2018 within in the Asia Pacific region, mainly due to Chinese government policies. Demand in 2019 is however expected to increase mainly from Vietnam where new plants are slated for completion in the coming years. The thermal coal flows, the mainstay of the Supramax and Panamax segments, into China, Thailand and Philippines are expected to mirror that of 2018.

"The Indian coal demand looks fairly good for next year," a shipowner source said. "The current consensus is that Coal India Limited will not be able to meet all the requirements and the power plants too are looking in slightly better shape following some regulatory changes," the source added.

FEWER DEMOLITIONS FOR CAPESIZE VESSELS

In 2018, the Capesize market saw 181 new orders totaling 20.2 million dryweight ton compared to 135 units amounting to 19.2 million mt in 2017, according to a report by Banchero Costa. Scrapping of older tonnage fell in 2018 with only 39 vessels amounting to 3.6 million dwt demolished compared with 186 vessels (13 million dwt) demolished in 2017.

The Capesize segment is also staring at a burgeoning fleet of the giant-sized Valemaxes, which can load approximately 390,000 mt of iron ore.

By the end of 2018, 54 new Valemaxes were expected in the market and this is forecast to increase by an additional 12 in 2019 with ten ships to be delivered in H1 2019.

According to an analyst with a shipbroking house, Valemaxes would make up an estimated 29% of Vale's seaborne exports in 2019, which is a 9% increase of seaborne iron ore exports being shipped on Valemaxes compared with 2018.

REGULATIONS AND IMO 2020 CHALLENGES

The biggest uncertainty lies with the new sulfur cap by the International Maritime Organization that will come into effect in 2020. While there has been an increase in interest from publicly listed shipping companies to install scrubbers on the Capesize vessels, market sources estimated only 15-20% of the fleet will be fitted with scrubbers. The payback on the scrubber installation will depend on the price spread between the high and low sulfur marine fuels.

In addition, one of the major concerns in the installation of scrubbers is also the risk of additional compliance costs for owners due to changes in regulations. Take for example the early adopters of IMO's ballast water management (BWM). The initiative of these early movers were not rewarded as their BWM systems were found lacking when it failed to comply with the later released US coast guard regulations

--Andrew Khaw, andrew.khaw@spglobal.com

--Shriram Sivaramakrishnan, shriram.krishnan@spglobal.com

--Edited by Liz Thang, elizabeth.thang@spglobal.com