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

12 May 2017, Global – China will be hosting the Belt and Road Forum for International Cooperation which will be attended by political leaders from countries around the world in Beijing on 14th and 15th May. We look forward to more details on their cooperation agreements following this monumental meeting. More than fifty Memorandum of Understanding (MOU) agreements on various projects in the transport, energy and communications sectors are expected to be signed.

It is challenging to quantify the impact of Belt and Road, which covers 65 countries accounting for around 60% of the world’s population base, 33% of the world’s GDP and 25% of global trade, on the global dry bulk shipping at this point due to limited information disclosure, particularly in Emerging Markets and as many of the projects are still in the early stages of conception, planning or development.

Nevertheless, we thought it would be helpful to take a stab at quantifying what could be the potential incremental demand impact of the Belt and Road Initiative on the global dry bulk shipping sector. These are preliminary rough estimates and we look to fine-tuning our analysis as we gain more clarity and data on the concrete Belt and Road projects in the coming years.

China’s Belt and Road Initiative is expected to boost infrastructure spending in China and in the participating countries, particularly in railroads, oil & gas pipelines, port terminals as well as other infrastructure development projects. Assuming that Belt and Road boosts infrastructure spending by US$200B per annum and 10% of this is spent on steel, this would imply around 44 million tons of additional steel demand per annum. The existing excess steel inventories can be drawn down to meet this increased demand near term. However, more steel will be required to meet this incremental demand in the coming years. To produce an additional 44 million tons of steel, we would need approximately an additional 62 million tons of iron ore and 36 million tons of coking coal. This would require around 109 additional Capesize vessels to transport these additional raw materials, representing around 6% of the global Capesize vessel fleet and absorbing 2% of the global dry bulk shipping capacity. Given the global dry bulk shipping sector’s moderate growth prospects, this incremental demand will help to absorb the industry’s oversupply and support the gradual recovery in freight rates over time. Iron ore and coking coal drive 29% and 5% of the global dry bulk shipping trade volume.

Chart: Global dry bulk shipping trade – breakdown by commodity type

Chart: Global dry bulk shipping trade – breakdown by commodity type

Our analysis above only shows part of the demand impact on the global dry bulk shipping sector. In addition, some of the increase in steel products will also need to be transported to the end market where the infrastructure project is being built. On top of this, the seaborne demand of other raw materials, such as cement, will also rise, benefitting the smaller dry bulk vessels market. More power will also need to be generated to operate these new infrastructure facilities, thus driving additional demand for more seaborne thermal coal. Thermal coal, steel products and cement drive 18%, 8% and 2% of the global dry bulk shipping demand respectively.

A key risk is that the Belt and Road Initiative turns out to be more fluff than concrete in reality. China’s outbound investments has been weaker than expected year-to-date, with outward foreign direct investment down 49% y/y to Rmb20B in 1Q17, a sharp contrast from its 44% y/y growth amounting to Rmb170B in full year 2016.

Meanwhile, let’s bring our focus back to the current dry bulk shipping market trends:

GLOBAL DRY BULK SHIPPING MARKET

+ Freight rates trend – weaker in all vessel segments except for Capesize: The Baltic Dry Index (BDI) fell 3% w/w to 1,005 but was still 69% higher y/y. We saw the sharpest decline in the Baltic Exchange Panamax Index which fell 8% w/w. In the smaller vessel segments, the Handysize and Supramax indices fell 4% each w/w. In contrast, the Capesize index rose 7% w/w.

+ Vessel chartering trends – fewer Capesizes but more Handysizes were chartered last week: Fewer vessels were chartered in the spot market in the Capesize (down 12% w/w and 2% lower y/y), Panamax (steady w/w but 15% lower y/y), Handymax steady w/w but 14% lower y/y) and Handysize (+125% w/w, +200% y/y) segments.

CAPESIZE MARKET

+ Freight rates trend – stronger: The Baltic Exchange Capesize Index (BCI) rose 7% w/w.

+ Trade flows trend – Iron ore shipping demand picked up while coal shipping demand languished last week: Fewer Capesize vessels were chartered in the spot market during the week, down 12% w/w and 2% lower y/y. 86% of the Capesizes were chartered to carry iron ore (higher than the 80% share in the previous week), 12% were chartered to carry coal (vs 19%) and the remaining 2% others. 62% of the Capesizes are loading from Australia (vs 54% a week ago), 29% from Brazil (significantly higher than the 9% share in the previous week) and the remaining 9% from other countries. 74% of these vessels (vs 72% a week ago) are carrying these cargo to China, 12% to Japan and the remaining 14% to other countries.

+ Demand-supply trend – more favourable than the other vessel segments: We expect the Capesize market to be the most favourable market among the various dry bulk vessel segments this year, mainly driven by our projected iron ore shipping demand growth of 4.4% in 2017 and 4.0% per annum in 2018 and 2019 which is slightly ahead of our projected net capacity growth in the Capesize vessel segment of 4.1% and 3.8% in 2017 and 2018 and well above our projected net capacity growth of 1.9% in 2019 based on the existing newbuild vessel orders.

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)

PANAMAX MARKET

+ Freight rates trend – continued to suffer the sharpest decline among the various vessel segments: The Baltic Exchange Panamax Index (BPI) corrected 8% w/w.

+ Trade flows trend – steady w/w but lower y/y, Japan still the key demand driver last week and sailing distances will widen given the surge in scheduled cargo loading from South America: The number of Panamax vessels chartered in the spot market during the week was similar to the previous week’s level. However, compared to the previous year, the number of Panamax vessels chartered in the spot market was 15% lower y/y. 36% of the Panamaxes are loading from South America (a marked increase from 13% in the previous week, 23% from Australia (vs 18% a week ago) and the remaining 41% from other countries. 41% of these vessels are carrying these cargo to Japan or Singapore-Japan, 21% to India, 21% to China and the remaining 15% to other countries.

+ Demand-supply trend – capacity growth is likely to outpace shipping demand: We expect the Panamax market to be the second least favourable market among the various dry bulk vessel segments this year with continued industry oversupply. We expect the Panamax market’s net capacity to grow 4.0% y/y. Although we expect the global coal shipping demand to improve this year, rising 2.5% y/y, the improving volumes are unlikely to be sufficient to offset the additional shipping capacity coming onstream. We expect 2018 and 2019 to be better years for the Panamax market as capacity growth decelerates to 1.4% and 0.1% respectively, below our projected coal shipping demand growth of 2.3% and 1.4%, supporting freight rate recovery in the Panamax segment.

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)

HANDYSIZE & HANDYMAX MARKET

+ Freight rates trend: The Baltic Exchange Supramax Index (BSI) fell 4% w/w. The Baltic Exchange Handysize Index (BHSI) also fell 4% w/w.

+ Trade flows trend – steady shipping demand w/w but lower y/y in the Handymax segment; ship chartering activity continued to grow w/w and y/y in the Handysize segment last week: In the Handymax market, the number of chartered Handymax vessels remained the same w/w in the spot market during the week but was 14% lower y/y. 38% of the Handymaxes are loading from the United States, 21% from Southeast Asia and the remaining 41% from other countries. 25% of these vessels are carrying these cargo to China, 20% to Southeast Asia, 20% to Japan and the remaining 35% to other countries.

In the Handysize market, more Handysize vessels were chartered in the spot market during the week, up 125% w/w and 200% higher y/y. Market demand remained mostly in the Atlantic region.

+ Demand-supply trend – 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 6.4% y/y this year, surpassing our projected minor bulks shipping demand growth of 4.8%. However, this situation is expected to reverse from 2018 where we expect net capacity to decelerate to 0.8% in 2018 and 0.3% in 2019 versus our projected minor bulks shipping demand growth of 3.5% and 2.9% 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)

GLOBAL DRY BULK SHIPPING SUPPLY GROWTH YEAR-TO-DATE IS TRENDING IN LINE WITH OUR CAPACITY AND DEMAND FORECASTS

The global dry bulk shipping capacity has risen 1.7% ytd to 807 million dwt at the start of May 2017. This is 3.5% higher y/y. If we were to annualize the ytd capacity growth, the global dry bulk shipping capacity growth is likely to be 5.0% in 2017, trending in line with our 4.9% capacity growth forecast.

We expect the global dry bulk shipping sector capacity to grow 4.9% y/y in 2017, slightly ahead of our forecast global dry bulk shipping demand growth of 4.3% this year. This, plus the industry oversupply accumulated in the historical years, could prevent freight rates and the BDI from rising more significantly than their current levels.

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.

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)

Implications on the dry bulk shipping stocks listed in the Asia Pacific

The dry bulk shipping stocks listed in the Asia Pacific 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). Their share prices could have downside risk if the BDI corrects further.

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index

Related Articles:

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

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