Dry bulk shipping charter rates to rise on unexpected demand growth as China teams up with Brazil
Increasing trade and contracting supply will support a recovery in charter rates on major dry bulk shipping routes by the end of 2017, with the prospect of China importing more coal and iron ore to combat pollution and poor quality, according to the latest edition of the Dry Bulk Forecaster, published by Drewry.
Furthermore, macroeconomic policy decisions by the Chinese authorities have had an impact on the overall dry bulk market, increasing vessel demand on key routes and resulting in a steady recovery in charter rates. These decisions include changes to the way people invest in housing and to the country’s wage policy division. Plus, a higher fiscal deficit target has been introduced.
Speaking to Baltic Briefing, Rahul Sharan, Drewry’s lead analyst for dry bulk shipping, says: “The Chinese economy has slowed down of late, and so we have seen the common effort to increase domestic spending and investment.
“First, they planned to have more people investing in housing so they brought down the initial amount that is required from the pocket. Second, they have tried to focus more on fiscal policy, and, in turn, have plans to expand their railways by 150,000km over the next four to five years.
“The Chinese economy has slowed down of late, and so we have seen the common effort to increase domestic spending and investment”
“Also, they plan to increase the fiscal deficit target from 2.3% in 2015 to 5%, which will mean more investment from the common side. This will actually help the overall investment into China, resulting in more production and, subsequently, more raw materials.”
A third point of note, adds Mr Sharan, is that wages have increased so domestic production has become costlier. “They are attracting more money so what is happening is that Chinese companies are trying to replace the expensive mined raw materials with imported materials,” he says.
In relation to charter rates, Mr Sharan expects the third quarter to be much better than the second quarter for capesize vessels, adding that he expects capesize charter rates to reach 10,000 per day by the end of 2017.
Eyes on Brazil
China’s efforts to revive its economy have not only helped the iron ore trade to recover but are also expected to boost tonne-mile demand, as Drewry envisages more of the commodity coming out of Brazil.
“At the moment, the entire Brazilian trade is something around 13% of the total iron ore trade that goes into China, whereas Australian iron ore is 45%,” says Mr Sharan. “In the past, we have seen that the Brazilian share was as high as 16%-17%, and what we are seeing now is a lot of joint ventures and collaboration between Brazilian and Chinese companies. Some of these companies have already bought valemaxes so they’re eyeing Brazilian trade, which effectively means that they’re importing more from Brazil.
“Even if the amount of iron ore coming from Brazil at the moment increases by 3%, it will mean some five to seven million tonnes from Brazil again. One valemax of say, 400,000 dwt in a year on the Brazil-China route takes approximately 110 to 120 days, so in that sense one valemax can do three round voyages between Brazil and China. One valemax can also carry 350,000 to 360,000 tonnes, so in a year it will carry 1m tonnes. Six million tonnes, therefore, will mean six valemaxes completely employed on this route.”
Whether or not this amount of iron ore from Brazil is sustainable remains to be seen, but Mr Sharan says that he is optimistic about its chances. “I assume that this will be sustainable, especially because the Chinese companies themselves are seeing it as sustainable – that is why they have other valemaxes on this route,” he says. “Investing such a huge amount at this point in time effectively means that the trade is going to stay on this route.”
Drewry expects freight rates on the Brazil-China and Australia-China iron ore routes for capesize vessels to strengthen over the next two quarters, but says that the return of laid-up vessels to trading could disrupt the expected improvement. For other commodities, Mr Sharan expects demand for coal-carrying vessels to increase in the coming quarters as Japan increases coal-fired power generation and China cuts domestic coal production.
On the grain front, Drewry expects trade to remain strong as recent heavy rains have enhanced the prospects for grains in Europe, CIS and North America, especially for maize and barley crops.
On the investment side, tighter financing options and restrained new ordering appears to have helped the dry bulk market to keep future supply in check, while a high number of slippages and cancellations will inhibit any substantial growth in deliveries over the next few years.
In Mr Sharan’s opinion, 2016 will prove to be the lowest year for total deliveries for dry bulk vessels since 1989: he expects total deliveries to be around 30m dwt. He says: “In the past, and certainly in 2011 and 2012, we’ve seen more than 100m dwt delivered so this has come down by 70%.”
Mr Sharan does not expect deliveries to increase much until 2018/19, when a number of valemaxes are due for delivery. “We expect total deliveries might increase by 30% from the 30m dwt today to 40m dwt in 2018/19,” he says. “Other than that, if you remove these valemaxes, delivery will be in the range of 30m-35m dwt at least in the visible future.”
What’s more, demolition of every-younger vessels is expected to further aid the slowdown in fleet growth this year and a predicted similar rate of demolitions and deliveries in 2017 will help keep oversupply in check.
Demand growth, which seemed to be an unlikely prospect throughout last year and the early part of 2016, is also helping the dry bulk market come up from the bottom, adds Drewry.