While many dry bulk market participants are optimistic — bullish, even — about 2021 prospects, given low fleet growth amid expectations of rebounding demand post-coronavirus, some are citing concern because of the uncertainty related to this recovery, combined with ongoing geopolitical tensions. Demand growth pegged at somewhere in the region of 4%-5% was positioned against fleet growth of 2%: a scenario that is supportive of higher freight rates next year.
In 2020, bulk commodity demand is seen contracting, pulled lower mainly by global coal trades, and mirroring estimates for the global economy. The International Monetary Fund sees a drop of 4.4% in global GDP this year, rebounding by 5.2% in 2021. China was the only country to record growth this year and the lift seen in dry bulk rates in the second half of the year is testament to that, with port calls way above that of the past year, according to Lloyd’s List Intelligence data. The country’s stimulus policy, aimed at infrastructure projects, saw steel production soar, leading to higher imports of iron ore and coking coal, key ingredients in the steel-making industry. It also saw higher soyabean imports as its pig herd gradually recovered from devastating swine flu. According to Arrow Research, China is charging ahead, with the rest of the world trying to catch up. It expects a “healthier” supply-demand balance next year but it does not expect “outsized gains” because although the recovery is gaining momentum, headwinds persist.
In October, China produced 92.2m tonnes of steel, up 12.7% on the same month last year, according to statistics from the World Steel Association. The global total rose 7% as some countries recovered. In the first 10 months of the year, China’s output was 874m tonnes, up 5.5% versus the same period in 2019, while the global total shrank by 2%. Given China’s dominance and importance in dry bulk trades, all eyes will be on Beijing’s next five-year plan, which is due to be approved and detailed in early 2021.
2021 should be “pretty nice” for dry bulk owners, said Shipping Strategy’s founder Mark Williams. The dry bulk market has been on a four-year cycle, and the downturn that started in 2016 should have ended in 2020, were it not for the pandemic. That could mean a slight delay in the start of the new upcycle, the UK-based consultant said, adding that he expects a peak to occur in the latter half of 2022. “Everyone is excited about a post-coronavirus recovery, seen as a ‘super-bump’, with latent demand coming to the fore,” he said. While China’s steel industry is of paramount importance, Mr Williams said he would be interested to see what China’s coal policy will be, given the trade tensions of late that have seen it ban coal from Australia. It also inked a $1.5bn deal with Indonesia, a potential sign of Beijing moving away from its largest trading partner.
Oslo-based Cleaves Securities also noted how China’s economy was normalising, evidence of which lay in record steel production and a drop in steel and iron ore inventories. Cleaves’ research head Joakim Hannisdahl does, however, see seasonal factors weighing on the market in the first quarter, while annual consecutive gains are expected until at least 2023, based on a record low orderbook. Dry bulk was his top pick within shipping. “We expect that Chinese authorities’ stimuli efforts will continue into 2021, and believe that a net restocking will follow as soon as the global commodity market finds a new equilibrium at a higher supply level,” he said. “This could be highly supportive for dry bulk shipping.” Higher iron ore exports from Brazil and Australia gave some respite to the dry bulk market this year, and the hope is that volumes can continue that trend in 2021.
Brazil’s mining giant Vale is looking to steadily resume operations following the aftermath of the Brumadinho dam collapse in early 2019, which forced the closure of several mining sites. The miner said it was targeting iron ore production in the 315m-335m tonnes range in 2021, lower than analysts had expected. That compares with a downward revision to 300m-305m tonnes this year. It is aiming for output of 400m tonnes by the end of 2022. Australian supplies could reach 897m tonnes next year from 875m tonnes in 2020, which itself is a rise of 4% from 2019, Cleaves estimates. While headwinds for coal trade remain, strong demand for agri-products and minor bulks, including bauxite, should bode well for the market. The optimistic sentiment has reached shipowners, with all leading listed companies citing strength in 2021. They are also bullish for the long-term prospects of the sector.
Maritime consultants Drewry is expecting higher earnings across all segments, according to its base case scenario, with the one-year time-charter rate for a capesize forecast at $17,100 per day in 2021 versus $14,900 this year. Similarly, panamaxes are forecast to achieve $11,900 per day next year from $10,500, while supramaxes should fetch $11,100 compared with $9,800. Handysizes, meanwhile, should increase by $900 on year to average $9,900 per day.
Shipping association BIMCO is, however, urging caution. Its chief shipping analyst Peter Sand expects another challenging and trying year to come, given the steep commodity import drops across advanced economies in 2020, combined with the uncertain path of trade tensions and questions about the pace of recovery, in view of new daily coronavirus infections. He advised patience until at least 2022 for some seasonal normality to return. While an expected increase in iron ore exports from Brazil was “an upside” for the market, promises by Vale in the past have been “disappointing” due to various incidents that have curtailed output. The one overwhelming factor in dry bulk’s favour is that the pace of fleet growth is expected to slow to 2% in 2021, marking the lowest increase in capacity since the turn of the century, according to Mr Sand, who anticipates demand growth at 3% to 4%. BIMCO expects 23.5m dwt to be delivered in 2021, versus demolitions in the range of 5m-10m dwt. “To some extent, the fall in bunker prices has protected dry bulk earnings from performing even more poorly than they otherwise would have done this year,” he said, adding that he expects a “slow” recovery in 2021.
Lloyd’s List Intelligence also forecasts lower fleet expansion over the next few years, with a compound annual growth rate of 4.3% from 2020-2024, dropping to 3.6% in the five years to 2029. That compares with 6.4% in the 2010-2019 period. Views on the market recovery are based on continued restrained ordering of new vessels, but higher freight rates during an expected upcycle that may lead to higher contracting, tipping the supply-demand balance once again.