shipping lane
Those attempting to calculate the likely cost of shipping grain by sea over the coming year would be wise to watch India, but not because the sub-continent has suddenly become a major player in international grain markets. Rather, because the resumption of Indian iron ore exports is likely to be a deciding factor in the supply-demand balance — and therefore charter price — of the panamax, supramax and handymax vessels that meet the needs of most grain traders.

Back in 2009-10, India exported some 117 million tonnes of iron ore, much of it shipped to China’s steel mills. But iron ore mining bans in the largest iron ore producing states of Goa, Odisha and Karnatka over 2012-16 saw exports slump to just 4 million tonnes in 2015, according to Drewry. Yet restrictions on mining and exports gradually have been removed and volumes have been building. India’s iron ore exports increased to 21 million tonnes last year and in 2017 growth has accelerated again — some 12 million tonnes was exported in the first quarter suggesting annual volumes will likely surpass 40 million tonnes this year.

Due to port restrictions, most iron ore bulk exports from India are loaded on panamax, supramax and handymax vessels rather than the capesize vessels that dominate the iron ore business from Australia and Brazil.

“Iron ore exports from India support freight rates for these vessels sizes, especially in the third quarter when grain exports will also peak,” said Rahul Sharan, lead research analyst at Drewry.

Owners desperate for ore and grain boost

Certainly, an increase in iron ore and grain exports later this year will be welcomed by bulk carrier owners and operators. The Baltic Dry Index, still the most reliable measure of bulk carrier shipping prices, dropped below 700 in February. Yet, since then it has remained above or near to the 1,000 mark, with sub-indexes for each of the vessel classes largely following its lead. Although, according to analyst consensus, spot freight rates are still not high enough to enable all owners and operators to consistently turn a profit, this year’s BDI performance represents a major improvement versus 2016 when the Index spent much of the first quarter below 500 and only broke through the 1,000 barrier in November.

The BDI’s gains so far this year have been reflected in the International Grain Council’s Grain Freight Index: on June 6, the price of shipping a tonne of grain from Brazil to the E.U. was $23 per tonne, up 10% year-on-year; the cost on the USA Gulf-E.U. trade was $22 per tonne, up 47% compared to a year earlier; while the price of shipping a tonne of grain from the USA Gulf to Japan cost an average of $34 per tonne, up 26% year on year.

Rates find 'new normal'

Speaking earlier this year, John d’Ancona, divisional director for dry bulk analysis at Clarksons Platou Asia, predicted that the higher ocean freight rates experienced at the start of 2017 were part of a new normal. He said shippers should expect ocean freight rates to remain volatile, but predicted they would generally be higher through 2017 than in 2016 as vessel supply and demand converged, a trend that meant “freight has suddenly become interesting again,” at least for investors and vessel owners.

After the “worst shipping market ever at the start of 2016,” he said “rates should stay supported through 2017 relative to 2016,” adding that there was now support for freight rates across numerous dry bulk commodities.

“This improvement in commodity support is helping freight, as is improved infrastructure demand and healthy bulk trades led by grains in some markets,” he added. “A lot will depend on sentiment, but a lot of people in the market want to see higher rates. They’ve had enough. No one knows for sure what will happen but always keep an eye on dry bulk market sentiment.”

Sharan also said it was likely freight markets would trend upward. Drewry expects high demolition activity and low newbuilding deliveries to mean that growth of the bulk carrier fleet will slow to an annual rate of 1% over the next five years. By contrast, tonne-mile demand will grow at a faster pace of around 3% per annum. Sharan said that as supply and demand became more balanced over the forecast years, charter rates were expected to improve gradually.

“I think we have come out of the worst phase of dry bulk shipping,” he told World Grain. “We should see rates moving up from here, though gradually.”

However, he argued that the lack of consolidation via mergers and acquisitions in the bulk shipping market compared to other shipping segments would prevent any extended rates surge based on owner cooperation as vessel supply and demand drew closer together.

“The dry bulk shipping market is very fragmented, very unlike the container industry,” he added. “It is very difficult for owners to come together and follow any course of action. It is very demand-dependent.”

He also took a different view than many of his peers when examining the types of factors that would impact on owner behavior in the current market.

“I have a contrary view,” he said. “I think we will see less lay-ups from now onwards. However, scrapping will be decided by the impact of regulations such as those governing ballast water management systems and SOx/NOx emissions over the next few years.

“As rates improve, normally we should see a decrease in scrapping, but the regulations might keep scrapping high.”

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shipping lane

The bear's view

Peter Sand, chief shipping analyst at Bimco, was more bearish than his peers. He said that after the Baltic Dry Index (BDI) suffered its usual seasonal weakness around the Chinese New Year in early February, stronger-than-expected demand came from across the board, which had lifted freight rates. However, he said this was a “false dawn” and that for bulk carrier operators to post a profit in 2017, the BDI would have to average above 1,280. “The last time we had that was in 2011,” he said. “And note that the BDI average for Q1-2017 was 945. Bimco sees the current developments as a ‘false dawn’ and reiterates expectations for 2017 as being a loss-making year for the industry as such, because the BDI average is well below 1,000.”

Sand argued that the usual seasonal decline in bulk shipping demand in the first quarter was offset this year by China’s combined imports of iron ore, coal and soybeans rising by 36.5 million tonnes (19%) year on year. This was aided by the grains shipping market going from strength to strength “with soya supporting the Atlantic market.”

The problem for vessel operators and owners, he said, was on the supply side, with the dry bulk fleet still growing and the higher BDI earlier in the year discouraging vessel demolitions.

“A ‘false dawn’ means that fundamental market balance improvements are happening much slower, if at all, as the supply side is still growing almost as much as the poor demand growth rate,” he explained. “Clearly the Q1 volatility naturally caught a lot of attention, but it remains central that overcapacity reigns. While demand growth is currently above the 2% longer-term estimate, Bimco see the current upswing as a short-term event.”

Bimco estimates some 19 million DWT of dry bulk tonnage will be demolished in 2017.

“We are on target for this,” Sand said. “7.1 million DWT so far have been demolished with May demolition levels being somewhat below the preceding months.”

A return to profit for owners would mean making more progress on supply-side discipline, Sand said.

“Orders are slowly picking up from the multi-year low level in 2016,” he said. “They are still at a very low level, but we have seen just as many new orders in the past two months as we saw in Q1. As prices for second-hand tonnage got back at par with newbuilding prices, owners started to place new orders. New orders year-to-date amount to 3 million DWT.”

While any return to large-scale placing of new vessel orders with desperate shipyards in Asia would hurt freight rate sentiment, Sand noted that the demand side of the shipping equation remained healthy. “The market is being boosted by Chinese coal imports, Chinese iron ore imports and South American grains and soybean exports,” he said. “In that sense it’s already strong.”

Indeed, he noted, grains were continuing to play a vigorous stimulatory role in the bulk shipping market as exports from the Black Sea as well as South America continued to rise, although not to levels that would make a major dent in the market’s overcapacity except on a seasonal or local level. “We certainly see new records of grain cargo being lifted, but the ships are already in position to take the cargo and the number of ships are matching this demand,” he said. “Larger volumes do not lift freight rates by themselves. The global dry bulk fleet is still capable of carrying much more than it currently is doing.”

And that latent capacity will act as a ceiling for shipping prices for much of the next 12 months.