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Chart 1: General cargo ships picking up containerized cargoes,
an influx of minor bulk cargoes has boosted the geared bulker
rates
The dry bulk and container market balance is expected to remain
stable in 2022, while freight rates may face correction when
vaccines reduce pandemic impacts.
We believe the strength in global containerized trade has had a
profound impact on the geared dry bulk freight rates and trade
pattern. General cargo (breakbulk) vessels that have shared similar
terminal and cargo with geared bulkers (Supramax and Handysize)
have shifted to the container-linked market because of extremely
high freight rates for container ships this year; container cargo
has been spilling over to general cargo ship (breakbulk/MPV/HL) 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. These higher demand and lesser
supply balance have boosted the geared bulkers' backhaul rates even
higher.
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, specifically
backhaul routes. Then a major assumption for the dry bulker rates
outlook needs to be based on the container market outlook. Based on
record high backlog and limited fleet orderbook in 2022, many
experts believe 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 in 2022, we expect many
geared bulkers will stay in the container sector, which practically
reduces fleet supply and enables them to outperform other size
sectors.
Minor bulk vs container
In the special edition of utilization index report Q4 2021 —
Shipping Market Cycle: container and dry bulk market outlook—
IHS Markit predicts that the global containerized export volume
will increase by 4.8% in 2021, mainly driven by strength in U.S.
container imports (15.7%) and will continue to grow by about 2-3%
in 2022 based on record high backlog and gradual recovery of global
economy. However, container freight rates are expected to face
correction in the coming years with supply-side pressure including
reduced congestion and a large number of newbuilding deliveries. We
expect annual container fleet growth will increase to 4.3% in 2021,
4.5% in 2022, and 7.5% in 2023, compared with 3.0% in 2020.
Chart 2. Consumers in the U.S. are supporting the container
freight rates for goods shipped across the Pacific; container trade
volume to U.S. are expected to increase by 2-3% in the next two
years
If we focus on 2022 market only, it is undeniably, container
market demand and supply balance looks stable until at least
mid-2022 and likely into full 2022. Although we believe container
freight rates will still face correction and decrease by 30-40% in
2022 with reduced impact from COVID-19 including record high
congestion in west U.S. ports in 2021, the container freight level
will still be way above historical levels and remain high enough to
employ a large number of general cargo vessels (MPV/HL) and part of
geared bulkers including open hatch-box type in container sector
commercially.
As we have mentioned in previous reports, we observed a
significant increase in the volume of minor bulk shipments mainly
driven by container-bulk convertible breakbulk cargoes comprising
bagged cements, fertilizers, chemicals, minerals, metals, and steel
products. Moreover, with general cargo ships and open-hatch bulker
carriers mostly picking up container-related cargoes, there has
been much less competition from general cargo sectors to dry bulk
sectors, which leads to supply tightness in backhaul minor bulk
routes. These higher demand and lesser supply balance has boosted
the geared bulkers freight rates so far this year and likely
support the rates in 2022 as well.
It is worth noting that with an extremely high container ship
orderbook, we expect a large number of container vessels will be
delivered from 2023 and will take market share back from general
cargo and geared bulk sector. If we assume unofficial options of
newbuilding contract to be declared from 2023, the container fleet
growth may go even higher than it is expected (7%). However, since
a major part of the container fleet deliveries will start only from
2023 and general cargo vessel fleet growth is expected to be flat
or even minus in 2022, a large part of container trade volume will
continue to spill over to the general and geared bulk market.
In this context, we expect the minor bulk trade growth is
estimated to be 13% (y/y) and is set to achieve another growth in
2022 by 2-3%, in line with global economic growth. However, 2023
minor bulk trade growth is expected to slow down significantly as a
decontainerized trend will be reversed and some minor bulk and
breakbulk volume will likely convert back to containerized mode of
transport with a large number of newly available container ships
and boxes.
Major bulk: iron ore, coal, and grain
In the same report - utilization index Q4 2021, IHS Markit
predicts that the global dry bulk tonne-mile demand will increase
by 3.3% in 2021, mainly driven by coal (6.1%) and minor bulk trade
(13.0%). It will continue to grow by 4.5% in 2022, largely
supported by global economic recovery-related industrial materials
including iron ore (5.5%), coal (3.4%), and agricultural goods
(5.1%).
For iron ore trade, in line with decarbonization goal, mainland
China's electric arc furnace (EAF) capacity is expected to increase
from about 10% in 2020 to about 15-20% of the total steel
production capacity by 2025 with its ongoing supply-side reform to
limit the overall crude steel production volume. At the same time,
blast furnace (BF) steel production is projected to increase very
marginally or potentially decline in the coming years.
However, basic oxygen furnace (BOF) is still the primary route
of steel production compared with utilizing scrap in the EAF
production method. Mainland China is by far the largest producer of
crude steel globally and currently only 11% of crude steel is
produced using EAF with the number expected to slowly increase in
the coming years. However, energy shortages and the rising cost of
electricity will prove to be a downside risk for EAF processes in
the short term as escalating costs of production will make BOF
production more competitive and therefore improve the prospects of
iron ore imports in 2022. Also, BOFs in most steel plants are
modern and young. Therefore, replacing BFs with EAFs will take
years owing to the high economic burden for many steel mills, while
costly electricity needs will continue to delay the development of
EAFs. Therefore, in our view, iron ore will remain as a main source
of steel production in the coming years despite mainland China's
increased consumption of steel scrap for steelmaking and annual
steel production cap.
Chart 3: Dry bulk demand is expected to increase by 4.5% in 2022
driven by the recovery of iron ore and grain trade.
More importantly, even if mainland China steel production may
cease to increase, the rest of the world will eventually need to
increase steel production to meet the anticipated global steel
consumption growth in line with global urbanization and economic
growth by 2-3% annually. This would cause steel product and iron
ore trade pattern to change. The mainland Chinese market share in
global iron ore imports will drop to less than 70% in the coming
years from 80% in 2020. Since most of BOF fleet are situated in
east Asia including Japan, South Korea, and Taiwan, iron ore
tonne-mile-trade distance is expected to remain similar compared
with the shipments heading to mainland China. Specifically, steel
capacity constraints owing to decarbonization and environmental
demands will drive the usage for higher grade and benefit Brazilian
high-grade ore export growth. Also, Brazilian iron ore and pellet
capacity will continue to grow and is forecast to reach about 500
metric tons in 2023 with Vale hitting about 400 metric tons,
although downside risk remains with reduced production of low
margin product. Therefore, we expect Brazilian ore exports to grow
by 8.4% in 2022 and 3.3% in 2023 as the pandemic and
license-related supply constraint issues are resolved.
On the contrary, we believe that the peak coal trade had ended
in 2019 with limited new investment in the coal sector. With the
recovery in energy demand and high gas prices, thermal coal demand
is expected to remain strong with growth of 5.4% in 2021 and 1.2%
in 2022 but will remain stagnant thereafter in line with the global
energy mix shift; environmental policies that favor renewables and
gas over thermal coal, and favor scrap over coking coal.
Metallurgical coal trade will recover from its 2020 levels and grow
in 2021 (4.8% y/y) and 2022 (5.0% y/y) but annual growth will start
to slow once it is near its 2019 levels.
Our assumption for the agricultural trade demand outlook remains
unchanged. Agricultural shipments will continue to grow in the
coming years with a structural shift in appetite of emerging
countries towards meat in line with urbanization.
Soybean trade has been slow in 2021 mainly owing to limited
end-stock, but the trade growth will continue during 2022-23 as
mainland China will increase its meat consumption. Mainland China's
soybean imports started to recover from the African Swine Fever
(ASF) in 2019 and 2021/22 soybean imports are forecast to be up 10%
from 2017/18. With weaker grain and soybean shipments from the
United States in the fourth quarter of 2021, stronger Brazilian
grain season is expected in early 2022.
Corn trade is expected to increase during 2021-23 mainly from
the U.S. and mainland China routes with the trade deal,
incentivizing agricultural trade. Ukrainian and U.S. corn will
increase market share in the coming months until South American
corn season starts in the second quarter of 2022.
Wheat trade growth has been flat in 2021 owing to the pandemic
and the tax issues from Russia, but will recover during 2022-23
with high feeding demand; the strength in feed grain demand offsets
the negative tonnemile impact from the recovery of Australian
exports, resulting in strong Black Sea exports.
Dry bulk supply
Chart 4: annual dry bulk fleet growth will slow to 2.3% in 2022
and 1.8% in 2023
With limited newbuilding contract and orderbook, dry bulk fleet
growth will slow to 3.4% in 2021, 2.3% in 2022, compared with 4.1%
in 2020.
With favorable freight rates, some shipowners triggered the
options of existing contracts with much lower contract prices.
However, fresh newbuilding contracts were limited in the first 10
months of 2021 with concerns and uncertainty over several
environmental regulations. Therefore, total orderbook ratio against
existing fleet remained extremely low at about 7% of total dry bulk
fleet compared with 20% in average over the past five years. Dry
bulk delivery ratio in 2021-23 is expected to be about 80-90%, and
newbuilding delivery will decline significantly in the second half
of 2022, according to orderbook status (launched, keel laid, under
construction).
With the availability of scrap candidates of 15+ years, freight
conditions and regulation-related additional costs (including
bunker prices) will be key for the demolition outlook. However, it
is unlikely to see demolition from younger age with favorable
freight environment. Also, most of the old Panamax and Handymax
vessels are employed for short-haul routes in the Pacific and
operated by domestic companies.
In the long term, dry bulk fleet growth will continue to slow to
about 1-2% in 2023 and the growth will remain limited about 2% in
2024-30 because of concerns about trade growth potential against
global decarbonization target and uncertainty over several
environmental regulations.
Conclusion
Chart 5: Vaccination should result in easing the COVID-19
restriction and consumer spending shifting from products to
services, reducing shipping demand and congestion
Traditionally dry bulk freight rates have been supported from
the top down, Capesize supporting Panamax and Panamax supporting
Supramax/Handy sizes. However, unlike in the previous years the
strong performance in the minor bulk trade has resulted in
supporting the larger vessel classes from the bottom to top. Also,
backhaul minor bulk rates became almost identical with container
rates. 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,
specifically backhaul routes.
That is why our major assumption for dry bulk demand and supply
has been heavily linked with container market outlook. Based on
record high backlog and limited fleet orderbook in 2022, many
experts believe that container rates are likely to remain high
until at least the first half of 2022 albeit lower than this year.
Our view is slightly different from the consensus but we share the
view that many geared bulkers will still stay in the container
sector, which practically reduces fleet supply and makes them
outperform other size sectors in 2022. However, as COVID-19
containment measures start to soften with vaccination rollouts
progress and decontainerized trend will be reversed with extremely
high container newbuilding deliveries, the strength in shipping
freight rates, especially Asia-Atlantic container-dry bulker rates,
would likely be under pressure and start to return to a
fundamentally reasonable level in later part of 2022 or early
2023.
In the latest update, IHS Markit Freight Rate Forecast models
predict BDI to fall 30% on the year in 2022 to average about
1,800-2,300 points in 2022 after reaching a 13-year high average
above 3,000 points in 2021, but it will still be significantly
higher than the 2011-2020 average of about 1,100 points and
breakeven level. We assumed container freight rates will face
correction and decline by 30% in 2022 but will remain high enough
to employ a large number of general cargo vessels (MPV/HL) and part
of geared bulkers and practically reduce active fleet and lead to
continued supply tightness in dry bulk backhaul routes. A lack of
stimulus from mainland China and the returning focus to
environmental policies that favor renewables and scrap over coal
and iron ore would be a major downside risk while continued high
congestion with the ongoing pandemic and record high backlog would
become a major upside risk on freight rates in 2022.
Please note this is summary of annual shipping market outlook
report for IHS Markit freight analytics subscribers. To see full
annual outlook report(123p), please contact Phoebus.kaloudis@ihsmarkit.com
or Daejin.Lee@ihsmarkit.com