BDI hits 3-year high, further gains depend on China & Japan’s restocking given benign supply growth

13 September 2017, Global – The Baltic Dry Index rose 8% w/w and 70% y/y to 1335, a level not seen since November 2014. Although this is still a far cry from its all-time high of nearly 12,000 back in 2008 when the dry bulk shipping sector made supernormal profits in 2007-08, the BDI’s return to its historical 10-year average level is encouraging. Importantly, the global dry bulk shipping capacity has risen 3.0% ytd to 815 million dwt at the start of September 2017. This is 3.7% higher y/y. If we were to annualize the ytd capacity growth, the global dry bulk shipping capacity growth is likely to be 4.5% in 2017. This is trending slightly below our 4.9% capacity growth forecast and close to our global dry bulk shipping demand growth projection of 4.3% this year. If China and Japan’s major bulk commodity restocking trends continues, it could sustain the current freight rate recovery.

Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)

Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)

Chart: Baltic Dry Index BDI (1985 to 2017)

Chart: Baltic Dry Index BDI (1985 to 2017)

 

GLOBAL DRY BULK SHIPPING SUPPLY GROWTH YEAR-TO-DATE IS LOOKING MORE BENIGN THAN EXPECTED

The global dry bulk shipping capacity has risen 3.0% ytd to 815 million dwt at the start of September 2017. This is 3.7% higher y/y. If we were to annualize the ytd capacity growth, the global dry bulk shipping capacity growth is likely to be 4.5% in 2017. This is trending below our 4.9% capacity growth forecast and close to our global dry bulk shipping demand growth projection of 4.3% this year. If this trend continues, it could sustain the current freight rate recovery.

We believe the industry will see more significant improvements from 2018 and 2019 when the global fleet capacity growth is expected to moderate markedly to 2.1% and 0.9% respectively, unless a significant number of new vessel orders with prompt delivery dates are placed going forward.

This will help drive greater upside in the dry bulk shipping rates as we expect the global dry bulk shipping demand to grow 3.5% in 2018 and 3.0% in 2019, ahead of the global dry bulk shipping capacity growth.

However, the risk of a boom-bust cycle remains as the dry bulk shipping sector has the lowest barriers to entry among the various shipping segments and fairly short vessel construction lead times. A strong rebound in freight rates could revive rapid newbuild vessel ordering again and cap their long-term upside.

IMPLICATIONS FOR ASIAN DRY BULK SHIPPING STOCKS

The Asian dry bulk shipping stocks have historically had a positive correlation (of 0.66) with the Baltic Dry Index as well as the Baltic Exchange Indices of each major vessel segment (BCI, BPI, BSI and BHSI). We expect their share prices to re-rate more strongly next year.

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)

Chart: Baltic Dry Index surged 8% w/w and 70% y/y

Chart: Baltic Dry Index surged 8% w/w and 70% y/y

The Baltic Dry Index rose 8% w/w and 70% y/y to 1335, a level not seen since November 2014. Although this is still a far cry from its all-time high of nearly 12,000 back in 2008 when the dry bulk shipping sector made supernormal profits in 2007-08, the BDI’s return to its historical 10-year average level is encouraging.  Stronger shipping demand in the Capesize and Panamax markets have been the key drivers of the current BDI rally.

CAPESIZE SPOT RATES REACH 3-YEAR HIGH, DRIVEN BY STRONG CHINA AND JAPAN SHIPPING DEMAND

  • The Baltic Exchange Capesize Index (BCI) surged 15% w/w and 75% y/y. This is the highest level since November 2014.

Chart: Baltic Exchange Capesize Index (2016 to 2017)

Chart: Baltic Exchange Capesize Index (2016 to 2017)

 

  • Chartering activity picked up in the Capesize market. More Capesize vessels were chartered in the spot market during the week, up 25% w/w although 17% lower y/y.
  • This has driven the strongest growth in the Capesize freight rates among the various vessel segments in the past month.
  • China and Japan’s shipping demand remained buoyant. 50% of these vessels are carrying these cargo to China, 24% to Japan/Singapore-Japan, 11% to Europe and the remaining 15% to other countries.
  • Most of the iron ore shipments are loading from Australia. 62% of the Capesizes are loading from Australia. Only 8% came from Brazil and the remaining 30% from other countries.  
  • Coal shipping demand has picked up. 56% of the Capesizes were chartered to carry iron ore, 33% were chartered to carry coal and the remaining 11% others.
  • We expect the Capesize market to improve gradually, with fairly balanced global iron ore shipping demand growth and Capesize market net capacity growth of 4% in 2017 and 2018 based on our forecasts. 2019 could be a bumper year for the Capesize market as global net capacity is expected to grow only 2% based on the existing newbuild vessel orders, well below the global iron ore shipping demand growth.

Chart: Global iron ore shipping demand versus Capesize segment capacity growth (2000 to 2019)

Chart: Global iron ore shipping demand versus Capesize segment capacity growth (2000 to 2019)

CHINA AND ASIA DOMINATE IRON ORE SHIPPING DEMAND

China is the most important driver of iron ore shipping demand, accounting for 72% of the global seaborne iron ore imports. This is followed in the distance by Japan at 9% and Europe at 8%.

Chart: Global seaborne iron ore importing countries (2016)

Chart: Global seaborne iron ore importing countries (2016)

CHINA HAS BEEN INCREASING ITS RELIANCE OF HIGHER QUALITY SEABORNE IRON ORE IMPORTS TO FULFILL ITS RISING STEEL PRODUCTION REQUIREMENTS

Notably, China’s steel output surged 11% y/y to 74 million tons in July 2017. China’s domestic iron ore output has fallen 1% y/y to 115 million tons in July 2017. However, the iron ore inventory levels at China’s ports have risen 29% y/y to 133 million tons in September 2017 which could potentially cap further restocking upside near term. 

Chart: China monthly steel output (1995 to 2017)

Chart: China monthly steel output (1995 to 2017)

Chart: China monthly domestic iron ore output (2003 to 2017)

Chart: China monthly domestic iron ore output (2003 to 2017)

Chart: Iron ore inventory levels at China’s ports (2003 to 2017)

Chart: Iron ore inventory levels at China’s ports (2003 to 2017)

PANAMAX RATES HAVE NEARLY DOUBLED Y/Y, WITH RISING CARGO EXPORTS FROM SOUTH AMERICA AND HIGHER DEMAND FROM JAPAN

  • Freight rates continue to improve. The Baltic Exchange Panamax Index (BPI) rose 6% w/w and 112% y/y.

Chart: Baltic Exchange Panamax Index (2016 to 2017)

Chart: Baltic Exchange Panamax Index (2016 to 2017)

 

  • The chartering market was buoyant in the Panamax segment during the week. The number of Panamax vessels chartered in the spot market surged 54% w/w and was 3% higher y/y. 
  • 21% of the Panamaxes are loading cargo from South America, 21% from Indonesia, 14% from US Gulf, 10% from Australia and the remaining 34% from other countries. 
  • 50% of these vessels are carrying these cargo to Japan or Singapore-Japan, 16% to Europe, 14% to China, and the remaining 20% to other countries. 
  • Capacity growth could outpace shipping demand, capping significant upside in Panamax rates near term. We expect the Panamax market to face industry oversupply challenges based on our projection that the Panamax market’s net capacity will grow 4% y/y in 2017. Although we expect the global coal shipping demand to improve this year, rising 3% y/y, the improving volumes are unlikely to be sufficient to offset the additional shipping capacity coming onstream. We expect the Panamax market to become more favourable from next year as capacity growth decelerates to 1% in 2018 and remaining steady in 2019, below our projected coal shipping demand growth of 2% and 1%. 

Chart: Global coal shipping demand versus Panamax segment capacity growth (2000 to 2019)

Chart: Global coal shipping demand versus Panamax segment capacity growth (2000 to 2019)

Chart: Seaborne thermal coal importing countries (2016)

Chart: Seaborne thermal coal importing countries (2016)

HANDYSIZE & HANDYMAX MARKET QUIETER THAN THE LARGER VESSELS’, RESULTING IN LIMITED RATE IMPROVEMENTS

  • More limited improvement in spot freight rates in these smaller vessel segments. Both the Baltic Exchange Supramax Index (BSI) and Handysize Index (BHSI) rose 3% w/w. On a y/y basis, the BHSI rose 22% y/y.
  • This could drive some profit-taking in major Handy operators Pacific Basin Shipping (2343:HK), First Steamship (2601:TT) and Precious Shipping (PSL:TB) in favour of the Japanese shipping lines Nippon Yusen Kaisha (9101:JP), Mitsui OSK Lines (9104:JP) and Kawasaki Kisen (9107:JP) which have been laggard performers ytd.

Chart: Baltic Supramax Index (2017)

Chart: Baltic Supramax Index (2017)

Chart: Baltic Handysize Index (2016 to 2017)

Chart: Baltic Handysize Index (2016 to 2017)

  • Handymax market is likely to face greater oversupply challenges. We expect the Handymax market to be the least favourable market among the various dry bulk vessel segments this year with continued industry oversupply while the Handysize market is likely to suffer from slightly oversupply.
  • On a combined basis, we expect the Handymax and Handysize segments’ net capacity to grow 6% y/y this year, surpassing our projected minor bulks shipping demand growth of 5%. 
  • However, this situation is expected to reverse from 2018 where we expect net capacity to decelerate to 1% in 2018 and remain steady in 2019 versus our projected minor bulks shipping demand growth of 4% and 3% respectively, supporting freight rate recovery in the smaller vessel segments in the longer term. 

Chart: Global grains and minor bulks shipping demand versus Handymax and Handysize segments capacity growth (2000 to 2019)

Chart: Global grains and minor bulks shipping demand versus Handymax and Handysize segments capacity growth (2000 to 2019)

Related Articles:

Shipping Equities gain from structurally improving sector outlook

“Belt and Road” Initiative’s impact on global dry bulk shipping and other BDI updates

Global Dry Bulk Shipping Outlook – Is the current Baltic Dry Index (BDI) rally sustainable?

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