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Listen: Atlantic dry freight: Have Q4 expectations fallen short?

Market expectations for Q4 were sky-high, but has the dry bulk sector delivered on its Q3 promise? S&P Global Platts Sam Eckett and Arthur Richier discuss how geopolitical challenges have affected different commodities around the Atlantic Basin, and how freight rates have been impacted as a result.

Related article: Brazil-China dry bulk freight rate hits six-month low of $33.75/mt amid high tonnage

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SAM

Welcome to the S&P Global Platts Commodities Spotlight podcast for November 26th, 2018. I'm Sam Eckett, associate editor for the Supramax and Handysize Atlantic dry freight markets here at Platts.

I'm joined today by my colleague Arthur Richier, Platts' senior pricing specialist of the larger Panamax dry bulk vessels. Together, we cover the dry freight markets West of the Suez Canal, and we assess voyage rates (or $/mt rates) of various routes and cargoes from the Americas, the Continent, the Black Sea, and from West Africa. Typically, the commodities being moved are either grains such as soybeans or wheat (commonly referred to as ‘clean' cargoes) or coal, bauxite, or petroleum coke (petcoke), which are known as dirty cargoes.

Arthur, thanks for joining me.

ARTHUR

Nice to be here.

SAM

Today we're here to answer a fundamental question that I know I keep being asked – and that's whether the fourth quarter of 2018 has failed to live up to the expectations of the dry bulk market in August and September. Whether, looking back, the quarter has performed as everyone expected it to – or, more bluntly, is the dry bulk market underperforming?

To me, there are two parts to this question:

1) How is Q4 performing compared to Q2/Q3 expectations?
2) How is Q4 performing compared to previous Q4s?

So, to begin with, I will outline where the Supramax market was in August and September and where the sources Platts spoke to expected to see it go. Essentially, what did the market think Q4 2018 was going to look like?

Back in August, the market was telling me that they felt there was potential for the market to go very big, mainly due to a lack of ships. Tonnage was tight along the US Gulf and East coasts even though demand was quiet and had been fairly slow for since mid-July, yet freight rates were still improving.

There were bumper US corn and soybean crops to look forward to, alongside bad wheat harvests in the EU, China and Australia, so soybeans were expected to play a big part in Q4 - either shipped directly to China or first south to ECSA for crushing, and then out to China afterwards. It was taken as a good sign at the time that ADM was heard taking five separate COSCO ships on period at relatively expensive levels, which, considering their global visibility on grains should've been a strong indication of very firm rates ahead.

Meanwhile, we were seeing all-time highs on ex-US Gulf grains and petcoke fronthauls, which were up an average of 16% year-on-year in September. With Florence, we had one bad hurricane in mid-September, but all predictions were that the hurricane season as a whole was going to be less severe than 2017. Everything looked healthy, the market was bullish. So, Arthur – where are we now, as November draws to a close?

ARTHUR

If we start by looking at market fundamentals of supply and demand, from a consumer perspective, there simply aren't enough grains in the Pacific to cover Chinese demand. According to World Agricultural Supply and Demand Estimates' data, China's import demand for soybeans is expected to be close to 95 million tons for the year 2018 on one hand. On the other, the US and Brazil are both expected to produce close to 60 million tons for export. China is the world's 1st consumer and the US and Brazil the only economies close to matching that demand.

These trade flows are well represented by our two freight rate assessments in the dry bulk Panamax market from Santos to Qingdao and from New Orleans to Qingdao, for respectively 60,000 and 66,000 mt grain cargoes, as well as our New Orleans to Kashima to a lesser extent on a Supramax size vessel.

The market expected Q4 to be very firm, with rates on a time-charter basis close to $17,000/day plus a 700,000 ballast bonus and today we are 3,000$ lower a day and 300,000 lower on the ballasting side. Did that expectation become a reality? The answer is not as firm as expected. Today the Santos-Qingdao freight rate is currently at a near 6 month low as it hit yesterday $33/mt, from an all time high of close to $41/mt at the start of Q4.

Why is that? Well we are facing an exceptional situation between the US and China trade-wise. Trumps tariffs on Chinese products have been met by retaliation from the Chinese specifically targeting grain imports. As such there have been very few grain cargoes out of the USG, to China, with reports of silos overflowing and cargoes just waiting to come out. As this was developing, at the start of Q3, US farmers turned to Iran, as imports of soyabeans by the Islamic republic have surging out of terminals on the Mississippi river. However, Iranian demand was not enough to sustain these exports and with US sanctions looming over Iran as well, the country grew weary of doing business with the US.

Sam, how is the Supramax market looking in the US Gulf?

SAM

In terms of freight rates, we are almost exactly at or slightly above where most brokers predicted we'd be at this point in the quarter. I've been looking back at the Q4 outlooks and people were saying things like: "I'm not sure rates are going to pass $30,000/day for fronthaul petcoke on Supramax. More likely it will keep at these $25-28,000/day levels."

Now, I just heard on Friday that an Ultramax had been fixed to West Coast India at or just a tick below $30,000/day, so it's my opinion that the more bullish of the shipowners were broadly correct.

I stand by the assessment that the US Gulf Coast market is headed for a strong end to 2018. Petcoke freight has had a very strong October/November. The trouble, of course, is the grains.

Grains exports from the US Gulf are a fundamental demand vector for Supramax fortunes and these have not been cancelled, just delayed. The US is still sitting on enormous soybean, corn and wheat crops, but harvests have been delayed and export figures are down YoY.

In terms of freight, long-haul grains cargoes from the US Gulf saw firm rates in Q3 despite the tariffs – you know, it's easy to forget in the context of the Trade War that China is not the only importer in the Far East. The New Orleans to Kashima, Japan 50,000 mt grains route, for example, was assessed up 12.4% over the quarter, compared with 7-8% falls over the same period in 2015 and 2016.

Nevertheless, despite China's 25% soybean tariffs, there are analysts predicting it may import between 10 and 15 million mt from the USA by the end of 2018, most of which will be shipped from US Gulf ports. The grains trade really is now all poised on the outcome of the US/China meeting at the G20 summit in Buenos Aires. So we still expect to see an active December and Q1 for the grain trades once that all-important geopolitical clarity is seen in the next couple of weeks.

Which brings us, of course, to South America. Arthur, what's been happening there?

ARTHUR

With the US Gulf off limits, China had to look elsewhere to feed itself, further south to Brazil. Now what happened is that demand for Brazilian grains exploded at the beginning of Q4, and it did so very quickly, with rates climbing to all time highs. Right now we even witnessed a situation where Brazil has struggled to meet its own demand for grains, prioritizing exporting the majority of their production to the Far East.

Since 2016, Q4 has always been stronger overall than Q3, with grain exports exploding, shipowners decided to ballast their ships towards the region. However, the Chinese met their demand too soon for the ships to arrive. The armada of ships previously ballasting to the region, meaing heading towards the region are now sitting open either in South Africa or in the south Atlantic, creating a situation of overtonnage and putting downwards pressure on the freight rates, leading to the 6 month lows we are witnessing today.

SAM

Have grains been the only disappointing commodity freight rate this quarter?

ARTHUR

Actually, no. Coal has not performed well either. Last week, news spread of China's National Development and Reform Commission (NDRC) halting coal imports in Jiangsu and Guangdong provinces until at least early 2019, according to sources in the Atlantic Basin. Though the ban was largely anticipated, no one expected it to last into 2019, traders even expecting it to last until after the Lunar new-year celebrations, which are set to start beginning of February
Sources in the freight market were unsurprisingly bearish in reaction. After the announcement, activity came to a halt when it came to Pacific coal cargo shipping activity. According to one shipowner source, "ultimately coal is the main driver of the freight market”. Negative sentiment spread to the Atlantic freight market as owners feared these ships would look towards the north Atlantic now to find cover.

The dry bulk market in the Atlantic would normally turn to the US, as everyone expects coal exports to increase during Q4 with the arrival of winter. However, we are also witnessing record high thermal coal stockpiles in Northwest Europe, which could prove problematic, as even flows of Australian coal had been seen headed to the Amsterdam-Rotterdam-Antwerp hub with little extra capacity at the terminal.

Once again, China's manipulation of its own demand has had a tremendous impact not only on freight rates to carry grains from South America to the Far East but also coal, in both the Pacific and the Atlantic, further helping along a disappointing Q4.

SAM

Thanks Arthur. So, I guess the answer to the question, is the market underperforming in Q4 is more nuanced than it might first appear. This is not a bad market, it's just a very good market delayed.

Atlantic dry bulk is seeing freight at (historically-speaking) very firm rates, and we may be in for a bumper Q1, which in the past has very often been a slow period for the sector. But like so many industries right now, the dry bulk market is subject to geopolitical factors that no one can predict. Hopefully, the picture will be clearer after the G20 Summit in Buenos Aires this week. Arthur, what can we expect from that meeting?

ARTHUR

Presidents Trump and Xi Jing Ping will be meeting, as the entire world watches to see whether they can put aside their differences and resolve their current trade dispute. An accord would break the current negative downturn of both of the world's largest economies. With American farmers struggling right now putting pressure on the American president and China needing to secure its future supplies of grains, both countries will need to think of what's in their best interests. Ultimately, a resolution will remove China's decision to raise duties on US supplies, and prevent further the stalling exportation of US agricultural products, opening the door to a strong Q1, with freight rates expected to surge alongside grain exports out of the US Gulf. However, if a solution is not found the freight rate dry bulk market will continue navigating troubled waters, as the outlook remains uncertain.

SAM

Arthur, thanks for joining me on S&P Global Platts Commodities Spotlight podcast. For more information please visit Platts.com or follow us @Plattsshipping on Twitter.

Until next time. Thanks for listening.