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We expect dry bulk market demand and supply balance will be
stable in the coming years. However, our data-driven forecasting
models predict freight rates will face correction and decline by
30% in the coming quarters as vaccines become more widely available
and reduce COVID-19 impact.
Chart: An influx of container-related minor bulk
cargoes has boosted the geared bulker's backhaul rates
higher
In the freight rate forecast demand and supply outlook, IHS
Markit predicts that the global dry bulk trade will increase by
3.2% in 2021 mainly driven by coal (4.4%) and minor bulk trade
(8.0%). It will continue to grow by 5.8 % in 2022 and 2.7% in 2023
largely supported by global economic recovery-related industrial
materials and agricultural goods while bulk fleet growth will
remain 2-3% in the next three years.
For fleet supply, even though some shipowners have exercised
options for existing newbuilding contracts placed in the previous
years with much cheaper prices, we observed that total orderbook
contract has been limited so far this year compared with historical
level. Especially uncertainty over several environment regulations
including carbon dioxide (CO2) emission control it
became difficult to have newbuilding order in the coming
months.
For steel, mainland China's electric arc furnace capacity is
expected to increase from about 10% in 2020 to about 15-20% of the
total steel production capacity in mainland China by 2025 to reduce
carbon emissions with its ongoing supply-side reform to limit the
overall crude steel production volume. At the same time blast
furnace steel production with iron ore is projected to increase
very marginally or potentially decline in the coming years.
However, in our view iron ore will remain as a main source for
steel production in the coming years despite mainland China
increasing consumption of steel scrap for steelmaking.
Specifically, we expect Brazilian iron ore exports to grow by 13.2%
in 2022 once the pandemic and license-related supply constraints
issue have been resolved.
Agricultural shipments are also expected to grow in the coming
years. Soybean trade has been slow in 2021 mainly owing to limited
end-stock but trade growth will continue from 2022 to 2023 as
mainland China will increase its meat consumption with continued
urbanization. Corn trade is also expected to increase during
2021-23 mainly from the United States and mainland China routes
with the trade deal earlier last year. Global wheat feeding could
increase owing to a lower availability and high prices of corn and
soybean in major origins.
On the contrary we believe that the peak coal trade had ended in
2019. With the recovery in energy demand and high gas prices
thermal coal demand is expected to remain strong in the next two
years but will decline eventually thereafter in line with the
global energy mix shift. Environmental policies that favor
renewables and gas over thermal coal and also favor scrap over
coking coal and iron ore will lead to more widely available coal
demand to be down. Metallurgical coal trade will recover from its
2020 levels and grow in 2021 and 2022 by 5-7% every year but annual
growth will start to slow once it becomes near its 2019 level.
We observed a significant increase in the congestion and very
high volume of minor bulk shipments. We believe this is the main
cause of current status of market. Minor bulk trade growth is set
to be the best-performing commodity in 2021 with a strong 8%
growth.
Traditionally dry bulk freight rates have been supported from
the top down Capesize supporting Panamax and Panamax supporting
Supra/Handy sizes. However, unlike in the previous years this
strong performance in the minor bulk trade has resulted in
supporting the larger vessel classes from the bottom to top. This
is a very interesting development because with general cargo
vessels especially from east Asia including mainland China, South
Korea, Japan, and Vietnam the vessels have moved to container
market now, especially convertible breakbulk cargoes from the
container sector including cement, fertilizers, chemicals,
minerals, and steel products. Recently, general cargo ships and
geared smaller bulkers picked up those container-related
cargoes.
There has been very high market on these traditional bulkers
backhaul rates as backhaul dry bulk rates became almost identical
with container rates. Therefore, the key assumptions for dry bulk
freight rates outlook also need to be based on container related
backhaul routes for geared bulkers. This route will hugely depend
on the pandemic and vaccination rate.
We expect vaccines will reduce COVID-19 impact. As global
economy recovers, overall consumption and energy demand will also
increase. But this could be countered by decreasing port waiting
times and also service-sector consumption will recover and reduce
physical consumption including online shopping. This may reduce
actual physical container trade and backhaul dry bulk trade
demand.
A lack of stimulus from mainland China and the returning focus
to environmental policies that favor gas renewables and scrap over
coal and iron ore would also be a major downside risk once vaccines
become more widely available in the world. Therefore, we are more
bearish with vaccine impact in the freight rate market. And also in
the medium and long term vaccines will reduce COVID-19 impact,
which will also reduce freight rates in the long term. However, in
the same context in the short term the ongoing pandemic and record
high backlog would become a major upside risk on freight in the
fourth quarter and early 2022.
Download the full complimentary report to learn more:
Freight Rate Forecast - Dry Bulk Market Briefing
2021