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China sets the stage for global shipping costs

 

KANSAS CITY, MO. — If 2022 had one theme, it was expecting the unexpected. It was the year that shocked the world with a war in Ukraine, endless Chinese COVID-19 lockdowns, soaring inflation and extreme weather, including in the United States, where Mississippi River levels dropped to historic lows. It has also, finally, seen the world forge ahead into a post-COVID future, even as large swathes of the global economy reeling from the recession.

Those in the business of buying bulk carrier capacity have had their surprises, not just in 2022 but throughout the pandemic, not least because they might have expected freight costs to fall more significantly than they saw the discrepancy between growth fleet and volume.

“In the four years since 2018, the dry bulk fleet has increased by 15%, but cargo volume has increased by only 2.9%,” said Will Fray, director of Maritime Strategies International (MSI). “Even ton-miles were only up 3.5% over this period.”

So what has bridged the gap between supply and demand growth? Fray said port congestion caused by COVID supply chain disruptions was “absolutely critical” to the strength of the freight market through 2021 and 2022. In fact, he said, congestion was the biggest driver price driver. Quite simply, rates over the period “can’t be explained otherwise,” she said.

The port congestion equation

By stranding large portions of the global bulk carrier fleet, port congestion has helped offset slow growth in demand by taking effective capacity away from the market, which has inflated returns for shipowners but added to freight and charter costs for shippers .

“We estimate that the positive impact of various fleet inefficiencies on market balances in 2021-22 was equivalent to the iron ore trade between Australia and China,” Fray said.

However, any reduction in port congestion could lead to a drop in freight and charter costs.

“When this support is removed as COVID-related inefficiencies diminish, the freight market will come under pressure,” Fray said.

This process is already underway. Port congestion at Chinese ports decreased for most vessel categories during 2022, although still-queuing numbers remain substantial. At least 800 vessels were docked in Chinese ports each week during 2022 and, in some weeks, that number surpassed 1,000 vessels, according to Breakwave Advisors. In late November, in the less than capesize fleet segments used to transport grain, some 239 panamax, 280 supramax and 171 reach vessels were stranded in China.

If this congestion eases, as many expect in 2023, and particularly if China eases its zero-COVID policies, then bulk carrier freight rates could plummet, especially as dry bulk volumes are expected to grow only by ‘1.6% in 2023, according to MSI.

Indeed, rates have already dropped significantly from their 2021 highs. The Baltic Dry Index (BDI) hit 5,650 points in October 2021, a two-year high, but had fallen to just 1,323 as of December 5, 2022. The Baltic Panamax Index (BPI) fell to 1,638 on December 5 from a two-year high of 4,328 in October 2021, while the Baltic Handysize Index (BHI) hit 732 in the first week of December, down from a high two-year rating of 2,062 in October 2021.

Similar decreases are evident in grain shipping costs. On Nov. 29, the International Grains Council’s (IGC) Grains and Oilseed Freight Index (GOFI) fell to 148 from its year-to-date high of 243 in May. Year-on-year declines of between -27% and -32% in the sub-indexes of the IGC were evident in the last week of November.

Ship supply and demand

There is little on the side of fleet growth to prevent a decrease in congestion from leading to lower grain shipping costs next year. Bimco forecasts fleet growth of just 2.1% in 2023, but even this will outpace projected volume expansion.

“Scrapping is expected to increase in 2023 as environmental regulations and an economic downturn could lead to the recycling of older tonnage,” the analyst said. “However, despite the aging fleet, total scrapping is expected to remain below 15m dwt due to the reduced order book.”

Owners have begun reducing sailing speeds to help reduce overall vessel availability. However, this is proving to be insufficient to maintain buoy rates.

“Congestion has started to clear in the second half of 2022,” Bimco said. “In November, it was down 4.8% year over year. In response to the cooling market and rising bunker price, average sailing speed has approached 11 knots and is now down 4.5% for loaded vessels and 2.4% year-on-year for ballast ships.

“Despite a drop in sailing speed, this has not been enough to compensate for the easing of congestion and, as a result, the balance between supply and demand has worsened (for shipowners).”

In 2023, Bimco expects both shipping speed and congestion to remain low due to limited growth in cargo demand and new International Maritime Organization (IMO) Energy Efficiency Existing Ship Index (IMO) regulations coming into effect. effective January 1, 2023 and are designed to reduce emissions.

Bulk carrier demand growth is expected to be slow at 1.6% in 2023 due to the more general global downward trend of economic indicators in major economies. This growth is being boosted by tighter fiscal and monetary policies as policymakers continue to target high inflation.

“It is important for the dry bulk markets, which means continued pressure on the real estate and durable goods demand sectors, which are typically sensitive to financing conditions,” MSI said.

The China question

China is still key to dry bulk trades and could be the key to any major shift in outlook given the knock-on effect steel and iron demand has on rates for smaller, sub-capesize vessels used by shippers of wheat.

After protests in China in late November against President Xi’s strict lockdown policies, there are signs his zero-COVID strategy may soon be eased. Official encouragement was given to regional administrators in December to avoid complete lockdowns and cut back on routine PCR testing, while Xi is reported to have told visiting European Council President Charles Michel that the Omicron variant was less lethal than previous variants and that his government would have tightened its vaccination program.

“In the past two days, a number of major cities, including Beijing, Shanghai, Guangzhou and Shenzhen, have eliminated the requirements of negative PCR test results for public transportation,” Nomura said in early December. “Overall, we believe China is discouraging strict citywide lockdowns and taking steps to ease overly restrictive COVID curbs, especially massive regular PCR testing. However, many other cities have yet to catch up, and some cities have even recently introduced new PCR testing requirements, suggesting that the central government has not yet given clear and direct instructions, and local governments are still confused.

Any opening of the Chinese economy could revive economic activity and stimulate demand for dry bulk cargo. Capesize rates are driven primarily by the steel industry and iron ore shipments and there were signs that Chinese demand was picking up in November as Chinese crude steel production and prices rose. Breakwave Advisors forecast that Chinese steel production was likely to bottom at the end of July and noted that inventories continued to decline.

MSI believes that any improvement in China’s real estate sector or an easing of China’s zero-COVID policy “has the potential to significantly boost demand and presents a clear upside risk to trade.”

“Progress, however, is likely to be incremental and take a number of months, especially as we are currently seeing a significant increase in COVID-19 cases across China,” the analyst added. “Until such progress is made, freight markets face the prospects for what could be particularly weak trade in the first quarter of 2023.”

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