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Two weeks ago, Capesize freight forecast models showed strong
near-term bullish signals on Brazilian routes for Feb/March 2022.
At the same time, the freight market was still on a downward trend
owing to negative news and sentiment resulting in the weakness in
Capesize freight rates. The weekly average of the Baltic Exchange
Capesize Time Charter Rates (24-28 Jan 2022) was at USD 6,928 per
day when IHS Markit models generated the forecast of the C5TC
predicting a rate about 20% higher than FFA assessment for February
and March 2022 contract.
Although the freight market could not avoid correction with
seasonality of the first quarter (Lunar new year holidays in Asia
and several weather issues), we have consistently argued in
previous commentaries that overall dry bulk fundamentals still look
fairly positive and ongoing strength in the container market will
continue to support minor bulk trade. Moreover, rising sentiment
for a post-Winter Olympic Games recovery in industrial production
has spurred on industry related commodities including iron ore and
coal prices.
In fact, market consensus for the overall freight market has
been quite bullish even with the significant decline in freight
rates over the first 4 weeks of this year. The positive sentiment
was reflected in a resilient period market and the FFA curve in
contango. Key questions were about (a) when market will rebound (b)
how much it would go up (c) how long the strength will continue. To
answer those questions, it is necessary to quantify the story into
signals.
C3/C14 Brazil routes demand
In early January, heavy rains caused a number of mine stoppages
in Brazil and put first-quarter iron ore shipments into question.
According to IHS Markit Coal Metals & Mining (CMM) group, Vale
halted train services on the EFVM railway and halted production
from the Brucutu and Mariana complexes in its Southeastern system
as well as all mines in the company's southern system. These
operations together accounted for approximately 30% of Vale's
production in 2021. The disruption-related reduced iron ore
shipments from Brazil was the main factor behind the weakness in
Brazilian freight rates. Therefore, the recovery in Brazilian iron
ore shipments will be the key driver for additional Capesize
tonnage requirements. It is clear that the resumption of mining
activities is expected if weather conditions permit but there is no
definitive timeline given. Therefore, many market participants
tried to figure out the level of port stocks, specifically from
Tubarao ports, an indicator of the mining operation recovery pace
in the southern system.
Advanced technology provided us the required visibility for port
stockpiles with satellite imagery. 3D models of several satellite
images of the area of interest could estimate the volume of port
stockpile, which can link to future flow of shipments.
The port Tubarao iron ore port stock level (pictured on 27
January 2022) finally showed the recovery after touching the bottom
of observed period in previous weeks. Indeed, we observed shipments
followed the recovery as can be seen in the snapshots below.
C3/C14 Brazil routes supply. With news of disruption in
Brazilian iron ore shipments, and expectation of recovery in the
freight market after the Chinese Lunar New Year, shipowners have
been extremely reluctant to lock their vessels with longer-duration
voyages with reduced rates. Therefore, we have observed the number
of ballasters remained extremely low; 23.24 million deadweight
(dwt) capacity heading to Brazil, or total 91 Capesize vessels
including 56 vessels from mainland China, 7 vessels from India, and
6 vessels from Malaysia (as of 28 January 2022) compared with
average about 130 Capesize ballasters heading to Brazil in February
2021.
If mining activity indeed rebounds according to signals from
iron ore port stocks above, Brazil rates (C3/C14) need to bid
higher or at least match the market expectation based on FFA
March-April contract to attract vessels towards Brazil in two to
three weeks. If ballasting capacity requirements follow the
seasonal pattern of previous years, about 40-50 more ballasters are
required to meet Brazilian iron ore demand in the coming four
weeks, indicating potential spike in Capesize freight rates in the
near-term. Baltic Exchange Capesize TC average has already
increased above USD 15,000 per day as of writing (10 Feb 2022) and
we expect the momentum continues in the coming weeks.
Other indicators : Container spillover- General cargo -
Geared bulker
Traditionally dry bulk freight rates have been supported from
the top down, Capesize supporting Panamax and Panamax supporting
Supramax/Handy sizes. However, unlike the previous years the strong
performance in the minor bulk trade has resulted in supporting the
larger vessel classes from the bottom to top.
We believe the strength in global containerized trade has had a
profound impact on the geared dry bulk freight rates and minor bulk
trade pattern. General cargo vessels that have shared similar
terminal and cargo with geared bulkers have shifted to the
container-linked market because of extremely high freight rates for
container ships; container cargo has been spilling over to general
cargo ship and then minor bulk cargo usually carried by container
or general cargo vessels have been shifted to geared bulkers.
Moreover, with general cargo ships mostly picking up
container-related cargoes, there has been much less competition
from general cargo vessels for supra/handy minor bulk routes. Most
of the general cargo ships (total about 43 million GT, similar to
total Handysize capacity) are no longer competing in dry bulk
sector while minor bulk shipments by geared bulkers have increased
by 12% year on year (y/y) in 2021. This higher demand and lesser
supply balance has boosted the geared bulkers' backhaul rates even
higher.
According to IHS Markit's JOC.com, the volume of containerized
cargo arriving in the United States on non-container ships jumped
42% y/y to 206,013 TEU during the first nine months of 2021. Within
this category, general cargo ships were the busiest, delivering
98,130 TEU to U.S. ports from January through September, up 82%
from the same period in 2020 and 65% from 2019, before the COVID-19
pandemic.
Therefore, we have consistently argued that as long as container
rates remain high enough to capture part of general bulkers and
open hatch cargo vessels in the container sector commercially,
geared bulker rates are expected to be supported, and again this
will support Panamax and Capesize sectors through shared cargo
including coal and iron ore. Based on a record high backlog and
limited newbuilding delivery schedule in 2022, IHS Markit believes
that container rates are likely to remain high until at least the
first half of 2022 albeit lower than 2021.
With continued strength in the container market, we expect many
geared bulkers will stay in the container sector, which practically
reduces fleet supply and makes them outperform other size sectors
and support our bullish view for the early part of 2022. However,
potential downside risk remains towards the end of the year as a
transition from pandemic to endemic COVID-19, the shift from fiscal
policy stimulus to restrain rising interest rates and tightening
credit conditions, a gradual shift back to a normal balance in
consumer spending between goods and service will eventually reduce
trade volume. But ongoing turbulence from the COVID-19 pandemic
delay the normalization. Transition will happen but not likely
until late in the year.
