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Panamax average earning has been supported by a strong grain
demand this year, despite the COVID-19 pandemic and limited coal
trade. Chinese demand for soybean remains strong, with the recovery
in pig herd and pork consumption from the outbreaks of African
swine fever. Brazilian farmers have benefitted from favourable
currency exchange rates and a record harvest season, and as a
result, Brazilian soybean export volume to China looks set to make
new monthly records several times this year. Also, as part of the
US-China phase one trade agreement, China has committed to
purchasing agricultural products from the US at almost 50% above
the 2017 baseline.
Particularly in August, while the Brazilian and Black Sea grain
seasons continued, chartering demand for US grain exports happened
earlier and stronger than many expected. Consequently, US grain
freight rates (P7) to China reached an 11-month high at USD45/tonne
(HSS 66,000 metric tonnes from US to China) and Atlantic Round
Voyage (P1A) earning for Panamax increased above USD20,000/day in
mid-August (14 August), for the first time since September 2019,
according to the Baltic Exchange.
However, it did not take long for the rates to face a sharp
correction. The Panamax Atlantic rates dropped below USD10,000/day
on 14 September and US grain rates also retreated by USD5/tonne
(equivalent to USD330,000 per shipment) within a month. Strong US
grain demand could not offset the losses of the Black Sea and
Brazilian grain export volume after the end of their respective
grain seasons. Furthermore, we observed Panamax coal stem switched
to cheaper Capesize and Supramax in September. As these classes
share cargo, each sector cannot remain at higher rates alone.
Strong Panamax freight rates need reasonable Capesize and Supramax
rates, and vice versa. Based on this assumption, FFA rates between
Capesize and Panamax, and between geared carriers, generally shares
similar directions.
Indeed, when Capesize freight rates reached their 13-month high
at USD34,896/day (6 October) in early October, it made a positive
impact on Panamax sentiments and improved Panamax FFA assessments.
However, the IHS Markit view is that fundamentals will ultimately
determine price. The degree of grain chartering activity out of the
US and when Chinese coal import quota will be eased will be key
factors for the fourth-quarter Panamax freight market.
For the grain trade, we have observed stronger-than-expected new
US soybean sales to China. As of the end of September, total US
soybean export sales commitments for the 2020/21 marketing year
reached 35.5 million tonnes, up 23.3 million tonnes from a year
ago. China's commitments totaled 19.2 million tonnes, representing
54% of the total, while unknown destination (likely China)
commitments totaled 10.1 million tonnes representing 28% of the
total. Strong Chinese crush margins are providing support for the
rapid import demand pace.
In our view, the phase one deal between the US and China would
eventually shift soybean trade back to pre-trade war patterns. This
means we can expect US grain export to return to, at least, the
2017 level. The IHS Markit Agribusiness intelligence team expects
the US combined corn and soybean export to peak at 14 million
tonnes in November.
For the coal trade, the Indian coal import demand has made an
impressive recovery, and this in turn supported Pacific rates;
however, the risk of Chinese coal import controls remains. Chinese
customs data shows total cleared coal cargo for September were down
38% from a year ago to 18.67 million tonnes, marking the worst
level since the final month of 2019. The IHS Markit coal, metals,
and mining team understands that the government's position on
import restrictions has not changed; therefore, it is unlikely
controls would be eased for the remainder of the year despite
speculation that the clearance process could be potentially
relaxed. According to IHS Markit Commodities at Sea
data, October seaborne coal shipments to China is expected to fall
further by 13% to 13.7 million tonnes, from 15.8 million tonnes in
September and 17.0 million tonnes in August.
Additionally, as the spread between Capesize and Panamax has
widened significantly in early October, we do expect Panamax market
share in coal shipments to increase in the short-term. However, our
forecast models predict that Capesize rates will adjust down again,
hence, the positive impact from the Capesize cargo split would not
hold.
From the supply side, we observed plenty of ballasters to the
Panama Canal to meet US Gulf grain demands. This will ease
positional tightness in the Atlantic. Furthermore, the number of
laden Panamax vessels anchored nearby Chinese ports peaked in
August, averaging 72 ships, and declined to 52 ships in early
October as coal and soybean shipments to China has decreased as
well as improved weather conditions. This will also provide enough
supply for NOPAC grain.
In short, Panamax freight will be supported with strong US grain
sales to China and improved coal demand from India and split cargo
from relatively expensive Capesize stem in the short-term. However,
our caution towards the end of the year remains as fewer chartering
activities are expected with China's coal import controls and
environment regulation, as well as efficient positioning of tonnage
and potential commodity price correction.