20 July 2017, Global – We track the latest bulk shipping demand and freight rates trends, checking back against our demand-supply growth forecasts for each vessel segment. In summary, the recent uptick in the Capesize and Panamax rates is mainly driven by a pick-up in China and Japan’s shipping demand. The rising share of ships chartered to carry freight from South America to Asia will lift ton-mile demand which is favourable for the sector. Meanwhile, the Handymax and Handysize vessel segments were in greater demand in the Atlantic region than the Pacific. We maintain our view that the global dry bulk shipping sector’s recovery will be gradual with more significant improvements in 2018. As such, we expect the Asian bulk shipping stocks to remain fairly range-bound near term and re-rate more significantly from 2018. The key risk is that the dry bulk shipping sector has the lowest barriers to entry among the various shipping segments and fairly short vessel construction lead times. More lucrative freight rates could revive rapid newbuild vessel ordering again and cap the industry’s long-term profitability.
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 stay fairly range-bound near term and re-rate more strongly next year.
Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)
Chart: Baltic Dry Index rose 2% w/w and 27% y/y
CAPESIZE MARKET PICKING UP AFTER 3 MONTHS OF DECLINE; CHINA’S IRON ORE RESTOCKING PATTERN REMAINS THE KEY SWING FACTOR
- The Baltic Exchange Capesize Index (BCI) rose 4% w/w and 4% y/y.
Chart: Baltic Exchange Capesize Index (2017)
- Capesize freight rates rebounded the most strongly among the various vessel segments after their sharp decline in the past 3 months.
- More Capesize vessels were chartered in the spot market during the week, up 14% w/w but 31% lower y/y.
- China’s iron ore shipping demand rose. Japan’s shipping demand also picked up.
- Rising shipments from Brazil lifted ton-mile demand which helps to absorb more industry capacity and is favourable for freight rates.
- 79% of the Capesizes were chartered to carry iron ore, 6% were chartered to carry coal and the remaining 15% others.
- 52% of the Capesizes are loading from Australia, 21% from Brazil and the remaining 27% from other countries. 76% of these vessels are carrying these cargo to China, 12% to Japan and the remaining 12% to other countries.
- 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)
- The record high iron ore inventory levels at China’s ports could impede iron ore shipping demand, unless steel production growth accelerates further, as discussed in our previous reports. The level of China’s iron ore inventories at ports has risen 35% y/y but stabilised w/w at 140 million tons as at 14th July 2017.
Chart: Iron ore inventory levels at China’s ports (2012 to 2017)
PANAMAX MARKET RECOVERY CONTINUES BUT FURTHER UPSIDE COULD BE CAPPED
- Freight rates continue to recover. The Baltic Exchange Panamax Index (BPI) rose 2% w/w and 42% y/y.
Chart: Baltic Exchange Panamax Index (2017)
- It has been a busy vessel chartering week, mainly driven by Singapore-Japan shipping demand.
- Rising shipments from South America help to lift ton-mile demand. The number of Panamax vessels chartered in the spot market rose 24% w/w and 11% y/y.
- 22% of the Panamaxes are loading cargo from South America, 13% from Indonesia, 11% from Australia and the remaining 54% from other countries.
- 40% of these vessels are carrying these cargo to Japan or Singapore-Japan, 13% to China, 10% to India and the remaining 37% 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)
HANDYSIZE & HANDYMAX MARKET IMPROVING GRADUALLY BUT HANDYMAX OVERSUPPLY IS STILL A DRAG
- Slight uptick in the smaller vessels’ rates. Both the Baltic Exchange Supramax Index (BSI) and Handysize Index (BHSI) rose 1% w/w. On a y/y basis, the BHSI rose 33% y/y.
Chart: Baltic Supramax Index (2017)
Chart: Baltic Handysize Index (2017)
- China, Europe and India shipping demand dominated the Handymax market. In the Handymax market, the number of chartered Handymax vessels rose 22% w/w but was 30% lower y/y in the spot market during the week.
- 25% of the Handymax vessels are chartered to carry cargo to China, 21% to Europe/Mediterranean, 18% to India and the remaining 36% to other countries.
- In the Handysize market, market demand was concentrated in the Atlantic region. The number of Handysize vessels chartered in the spot market remained the same w/w and y/y.
- 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)
GLOBAL DRY BULK SHIPPING SUPPLY GROWTH YEAR-TO-DATE IS TRENDING IN LINE WITH OUR FORECAST
The global dry bulk shipping capacity has risen 2.3% ytd to 811 million dwt at the start of July 2017. This is 3.8% 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, trending slightly below 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.
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.
Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)
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