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Intermodal Weekly Report

21 Μαΐου 2021.

shipsport92Market insight by Tamara Apostolou, Research Director

 

The dry bulk market’s counter seasonal surge so far into the first half of the year -in a sort of 2010 manner - and Capesize’s recent retreat from almost 11-year highs is raising the question whether a counter seasonal market drop is in the cards during the 2H of the year in the context of a broader market upcycle.

While the market is multi-factorial with fundamentals, sentiment and inter-freight correlation amongst sizes feeding one another, the current Cape market correction was exacerbated after Chinese authorities intervened to curb iron ore price speculation. A subsequent sharp reversal of iron ore and steel prices from record highs and FFAs selling off contributed to pulling the Cape market lower, while the smaller segments were unaffected. It is well known that Capesize is characterized by the highest freight volatility and even though that we expect volatility to keep up, we are not convinced that this is the turning point for a prolonged market correction. Fundamentals are likely to outlast volatility and we cannot exclude that the next leg higher will find a much higher peak over the next two quarters with cargo export seasonality emerging stronger across all commodities and particularly iron ore.

Iron Ore exports to accelerate in 2H2021; the urge for higher quality iron ore is likely to intensify: China’s iron ore inventories have been destocked by more than 8.0 million tons over the past month amid elevated demand and major iron ore miners running behind their export guidance, likely to trigger a new restocking wave. Forward iron ore prices on the curve, even if spot iron ore prices softened from here, incentivize iron ore miners to accelerate exports during the 2H2021.

So far, China’s emissions regulations on steel production were unsuccessful in containing it. Record high steel mills margins incentivized higher steel production ex. strictly regulated Tangshan with YTD Jan-Apr crude steel production up +15.6% y-o-y. If steel production controls intensify during the second half, this will further increase demand for high quality iron ore, in order to optimize the steel process. In addition, the scrap scramble from steel mills outside China could put a lid on China’s increasing scrap usage in the steel mix in the short term.

Macro indicators continue to be bullish for dry bulk demand in the next quarters: China’s Property new starts - a leading indicator of steel demand – have increased +19.0% YTD in 2021, while April’s y-o-y growth slowed down at +9.3% y-o-y. Any slow down in the growth of new floor space under construction will not immediately translate into lower steel and iron ore demand; developers are likely to accelerate property completions from now on continuing to drive demand.

Other than China, global steel production and demand conditions are robust, reflected by record high steel prices both in the US and Europe. Spot and forward steel prices have surged, giving steel mills the opportunity to hedge at profitable levels, therefore global steel production will continue to expand.

Global manufacturing PMIs are at 10 year cycle highs, despite having softened during April and lead demand for commodities. Oil prices have been lagging the rise in other commodities and are projected to increase significantly over the next two quarters, which could provide further support to the dry bulk market via - and not limited to - the bunker-$ per ton freight- speed relation. Fundamentals of other dry bulk commodities are also robust, with electricity generation set to accelerate over the summer in addition to increased industrial production, while China’s domestic coal production is underperforming amid mine safety checks.

Early signs of credit tightening: Following a record high stimulus over the previous year, latest credit growth figures in China indicate a slow-down in credit supply during April, however as long as inflation at the producers level accelerates the tightening impact is muted in our view. China’s potential deleveraging from here should not be expected to have a negative effect on dry bulk commodities demand, until credit tightening starts to interfere with producers’ profit margins.

Last but not least, China’s political tension with Australia is more likely to translate into higher ton-miles in the medium term, with Atlantic production of high-quality iron ore and coal substituting for any potential loss of Australia’s market share. In the longer term, China’s 14th year plan that calls for an increase of electric arc furnaces (scrap) in steel production to 15-20% by 2025 and self sufficiency share of iron ore above 45% will certainly have an impact in the way iron ore is procured with China having higher control over both supply and iron ore prices.

 

Chartering (Wet: Stable- / Dry: Stable-)

 

The Capesize sector lost ground last week, with BCI losing 841 points w-o-w. The rest of the sizes maintained their upward momentum with the Supramax sector being the most prominent riser among them. The BDI today (18/05/2021) closed at 2,795 down by 459 points compared to previous Tuesday’s (11/05/2021) levels. Rates for the crude carriers market managed to more or less sustain their levels last week with charterers still having the upper hand in the overall segment. The BDTI today (18/05/2021) closed at 611, an increase of 5 points, and the BCTI at 533, an increase of 29 points compared to previous Tuesday’s (11/05/2021) levels.

 

Sale & Purchase (Wet: Firmer / Dry: Firmer)

 

Secondhand activity significantly firmed last week, with a plethora of dry bulk and tanker deals materializing while a good volume of boxships have also changed hands. In the tanker sector, we had the sale of the “STARLIGHT VENTURE” (318,825dwt-blt ‘04, S. Korea), which was sold to Chinese owner, WenLing Chang An, for a price in the region of $30.6m. On the dry bulker side sector, we had the auction sale of the “TIGER SHANDONG” (180,091dwt-blt ‘11, China), which was sold to Chinese owner, Richland, for a price in the region of $23.31m.

 

Newbuilding (Wet: Softer / Dry: Softer)

 

There has been another slow week for the shipbuilding market. With only a handful of orders materializing last week, it seems that momentum for a potential ordering slowdown have been started to build up. Indeed, these past two weeks, contracting activity has been very quiet. With Chinese steel plate prices, factoring in yuan’s appreciation, have increased by approx. 45.0% since Q4 2020 and more than 80% y-o-y, having surpassed 2008 levels in dollar terms, newbuilding prices have also appreciated, especially in the dry bulk sector. The same pattern was observed as regards to the Japanese values, yet with steel plate prices increasing at a slower pace which may explain the short term narrow down of the Japanese NB asset values premium vs Chinese 1st tier yards. While the underlying steel inflationary trend pointing on a further newbuilding asset value improvement, it seems that owners have started to adopt a more conservative approach for newbuilding vessels. Last week, Taiwanese owner U-Ming declared an option for a pair of 210.000dwt units at Qingdao Beihai. In addition, KSS Line inked a deal for two dual fuelled 86,000cbm VLGC at Hyundai Hi at $81.0 million each. As far as the Container sector, both Minsheng Financial Leasing and Cosmoship declared options for two more units; MSFL ordered two 16,000teu boxships at Dalian Shipyard while Cosmoship exercised an option for two 1,500teu boxships at Huangpu Wenchong.

 

Demolition (Wet: Firmer / Dry: Firmer)

 

Prices in the demolition market remained on an upward path last week with average levels across the Indian subcontinent markets being posted close to mid $500/ldt. Of course, this development is strongly supported by the increased steel prices; given the steel price dynamics, we have noticed a substantial improvement in offered scrap levels which coupled with the scarcity of vintage candidates, it will not be a surprise to see scrap values even reaching levels close to $600/ldt. At the same time, activity was slow; the beginning of the Eid holidays has its own effect on the overall market slowdown while the national lockdowns are having adverse effects on the delivery of units. All in all, with the exception of the rising cases of Covid-19, fundamentals remain strong, with further improvements on scrap prices potentially to follow that may lead more vintage tanker and offshore units to the recycling option.

 

Wet Chartering

 

The crude carrier markets remained under charterers' control for another week. With the exception of the Aframax market where North European activity managed to breathe life into rates, rates for the rest of the sectors were under pressure as intense lack of fresh cargoes forced competition among owners looking to cover their open tonnage.

VLCC rates stabilized this past week. Both the Middle East and West Africa market activity remained subdued with limited fresh business surfacing in the market and with the number of open vessels at a high mismatch compared to the limited demand.
Average Suezmax T/C earnings fell down to -$1,695 per day last week on the back of a weak West Africa market and a soft Black Sea activity. Middle East rates remained flat w-o-w with TD23 posting at the 16.93WS points mark. A jump in North European tonnage demand bolstered Aframax earnings in the region. At the same time, both the Black Sea and Caribs Aframax market suffered discounts last week, with the latter losing 5.93WS points w-o-w. Overall, average T/C Aframax earnings increased by $1,521 per day.

 

Dry Chartering

 

The Capesize market corrected sharply downwards from 11-year highs over the week, while sub-Capes continued to be supported. Thin iron ore trading activity amid the holidays, lower S. Africa coal inquiries and more ballasters to the Atlantic partly contributed to the drop. However, the main driver was a sharp reversal in iron ore prices after rallying to record highs earlier in the week, with China raising trading limits in order to control speculation. An FFA sell off further exacerbated the drop, while market fundamentals continue to remain solid particularly for the later part of June.

Cape 5TC averaged $38,070/day down -11.5% w-o-w, with the Atlantic dropping at a faster pace. The weekly average Cape transpacific RV premium to the TA RV averaged +$6,114/day up from a +$3,124/day the week before.

Panamax 4TC averaged $25,920/day up +6.2% w-o-w with the TA RV rising at a faster pace. The Panamax transpacific premium declined slightly at +$6,114/day from +$6,584/day the week before.

Supramax 10TC averaged $24,884/day, up +5.0% w-o-w. The Pacific market continued to outperform supported by Chinese coal demand, despite a slow down from India. Slight improvement in the Atlantic market with ECSA being the main driver. Supramax in Asia continues to ascend to new highs despite China’s coastal coal freight index reversing downwards over the past week.

 

Analysts:

Yiannis Parganas

Tamara Apostolou

 

 

 

 

 

 

 

 

 

 

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