DRY BULK MARKET: WHAT NEXT
It is no secret that the shipping market, like the tide, is cyclical - when demand exceeds supply, freight rates rise and when the reverse applies, the opposite is true. It is also no secret that vessel prices follow freight rates meaning shipowners can profit by buying as prices are going up and selling before they fall. The difficult part is knowing when the tide is about to turn. There is never a shortage of commentators giving their opinions. Now, after a 16-month surge, more so than ever. But, are those who say the tide is turning correct?
Recent movements in the market do indicate something is changing. Following a small dip in the first half of September, the Baltic Dry Index reached 4,233 on 15 September. This brought it close to the annual high of 4,235 on 27 August. However, the momentum that has driven the Index upwards from under 400 in May 2020 appears to be at an end. The trend line is now flat or even slightly downwards.
What next? On the one hand, rates are at their highest since 2009. On the other, they are still well below the all-time high of 11,793 reached in May 2008. Will rates continue to rise after a temporary pause? Will they plateau? Or, will they fall?
All the indicators are that the answer to this question, at least over the next year or so, will be driven by changes in demand rather than any significant change in supply. At the end of May the global order book for dry bulk vessels stood at 619 vessels. At 5.5% of the current fleet this is a historic low for the orderbook-to-fleet ratio. Meanwhile vessels scrapped in the first five months of the year rose from 35 last year to 47 this year. As a result, no significant change in the global fleet can be expected over an 18-month horizon.
On the demand side there is room for interpretation of what has been happening over the past two to three years. The recovery we have experienced since the end of May last year is undoubtedly connected with the surge in economic activity as first China and then other parts of the world resumed trade, more or less as normal, following the Covid-19 epidemic.
Views on what happens next can be broadly split into three camps. The optimists see the rise in rates over the past sixteen months as something more than a post-Covid-19 bounce. They believe we are due for an upward swing in the shipping super-cycle and point to an upward trend that started in 2019. In their view that was the start of an upward movement in the super-cycle of shipping rates. All that Covid-19 has done is to delay an inevitable rise that could eventually take us back to the heights seen in 2009.
The pessimists look at things rather differently. They worry that the impact of Covid-19 is not yet over and fear that the increase in rates is a result of congestion at ports following disruption. Under this view, when things get back to normal, rates will fall. The whole situation could be made worse if new strains of the virus further disrupt global production.
The middle view is that the recent recovery has largely been a post-Covid-19 bounce. With supply and demand now back in equilibrium we can expect rates to plateau for the foreseeable future. They will not fall but we cannot expect them to rise for the foreseeable future.
Of course, only time will tell which of these views is correct. However, there are clues which may give us some indication. Global demand for dry bulk reached 1.69 billion tonnes in the first half of 2021 – this is the highest-ever start to a year. Whilst some of this volume is undoubtedly pent up demand released as the pandemic reseeded, the sheer volume suggests that there is an underlying trend upwards. This view is reinforced by the IMF. In its World Economic Outlook, published in July the IMF predicts that global economic growth will be 6.0 in 2021 and 4.9% in 2022 although it does warn that these figures are sensitive to success, or the lack of it, in fighting Covid-19 and efforts to prevent inflation.
According to United Nations Conference on Trade and Development the main driving factor for the dry bulk market over the last quarter of a century has been the rapid industrial development of China and the increasing importance of its place in global supply chains. This in turn has led to the dominance of Asian and Intra-Asian trade - by 2019, 41% of the total volume of goods loaded was delivered from Asia and 62% of imported goods were shipped from this region. But, while Asia’s increased role in global manufacturing chains has significantly increased international trade, UNCTAD suggests that the trend towards the globalisation of supply chains has not yet reached its end point. It predicts that supply chains will continue to become more complex and more extensive in future. This will increase demand for the transportation of raw materials and semi-finished products faster than the growth of the global economy.
These structural changes plus significant additional demand for the transport of grain as developing markets increase consumption (2021 is expected to be a record year for import of grain to China) suggest that demand increases will continue to outpace supply for a number of years to come. If this happens, we can expect a sustained upward trend in rates once short-term disruption caused by Covid-19 is truly over.
So, even if the pace has slowed, it seems the tide is still coming in.
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