Running hot

As the midpoint of 2021 approaches, we review the dry market’s impressive performance over the last six months and what the key drivers have been.

The rally continues

The dry cargo market has taken many by surprise so far this year, as rates have charged upwards to their highest levels in over a decade. In May, average Capesize rates nearly hit the $45,000 per day mark, the highest since 2010, and 28% higher than last year’s high in October. Kamsarmax rates meanwhile have continued to ramp up, gaining 169% since the start of the year to reach over $31,000 per day, more than double where they were this time last year.

But the star performers have been the geared ships. At $31,500 per day, Supramaxes are on average earning almost three times what they were in January, and 28k dwt Handies are currently trading at over $24,000 per day, their most expensive since the boom years of 2008, as new fixtures continue to emerge at levels which were almost unthinkable just a few months ago. Overall, the Baltic Dry Index remains at levels not seen since mid-2010, and has rocketed by 129% since the start of the year.

In line with the spot market, second-hand values for bulkers, especially older tonnage, have also made hefty gains. This market has been particularly frothy since contracting of new ships has been historically low, owing to a large containership orderbook and regulatory uncertainty.


As ever, a key ingredient for improved rates this year has been Chinese steel production, which has continued to set fresh output records over each of the last three months. As production in other countries slowly climbed out of its COVID slump, Chinese market share swelled, and production in China is generally more iron ore-intensive, given that recycling plays a small role in the production mix relative to other countries.

Greater demand for construction related goods was driven by stimulus spending in mid-2020, but as Chinese manufacturers capitalized on robust consumer demand, the need for higher grade steel products has also grown significantly. On top of this, the slow recovery in output elsewhere has driven a boost in external demand for Chinese steel. This is helping to prop up output, but is also providing employment for Supramaxes in the form of exports.

Despite the strong performance in steel however, iron ore trade has not been so impressive. This is partly why, in relative terms, Cape rates have not seen gains on the same scale as the smaller ships. YTD iron ore trade is on track to grow by less than 3% relative to the same period in 2020, which was itself a weak year for volumes. Amid extremely high prices, output from the major producers has been constrained by poor weather, maintenance and outages which have throttled seaborne supply. Inefficiencies (which we will come on to) and strength in other trades such as coal have insulated Capesize demand, but growth in shipments of iron ore have been fairly average so far this year.

Of the other commodities, one of the strongest performers has been the grains, growing by 11% YoY over the first five months of 2021 and boosting demand for the Panamax and geared segments. Less frosty trade relations between the US and China and an improved Swine Flu situation have propelled total grain shipments from the former by an estimated 40% YoY over 1H 2021. This is partly driven by a boost in soybean exports but also in liftings of corn and sorghum, which China has been buying in record quantities as it replenishes domestic stockpiles of these goods.

Meanwhile, outside of the ‘major’ commodity groups, the minor bulks have been performing extremely well, again helping to support rates on the smaller ships. Liftings of these goods hit record levels in May, surging by 30% YoY to 130m tonnes. Assuming shipments maintain their current pace for the remainder of June, they are on track to grow by 19% YoY over the first half of 2021. Within this are commodities such as aggregates and cement which have seen a boost in demand from stimulus-driven construction drives. Liftings of these goods are on trend to jump by 13% and 21% YoY respectively.

At the same time, fertilizer trade has grown by 10% YoY over this period, supported by continued growth in planting areas for grain production. At the same time, forest products such as logs, timber and woodchips have also maintained strong levels of growth, with loadings on track to rise by 23% YoY.

Inefficiencies mounting

Underlying these strong trade figures have been a number of market inefficiencies and distortions, either due to the pandemic or trade disputes. These are also helping to keep the market tight and rates high. For example, crew changes remain difficult to perform in some countries, requiring diversions and lengthier voyages, while quarantines and testing protocols translate to longer periods waiting at ports.

As we’ve written recently, these effects have been most acute for the Capes, given Australia’s requirement for ships to be at sea for a minimum of fourteen days before they can call at its ports. This means that vessels ballasting over from the Far East have to either slow down, or spend an extra few days at anchor off Australia before loading.

For ships opting to change crews in the Philippines, a popular option, the fourteen day clock is reset at this point, and more time must be spent idling as a result. The upshot of this effect is that over the first half of this year, Capesize demand per tonne of cargo on a C5 voyage from Australia to East Asia has been 15% higher than the pre-pandemic average. As a result, Capesize fleet utilization has received a leg-up, despite cargo volumes seeing only limited gains.

Forward pricing

If spot rates are sky-high, then values of the deferred dry bulk freight contracts are in orbit. Front-month and front-quarter FFAs have been extremely volatile, and at times, pricing at huge premiums to the spot indices and helping to fuel the physical market. Between the start of the year and mid-June, Q3 2020 Capesize paper, for example, gained over $25,000 in value, and is currently trading above $39,700. This is 24% higher than the current spot market level.

The calendar-year contracts for next year have also seen colossal increases implying that participants have made significant upgrades to their forward expectations. Since January 1st, Cape Cal22 FFAs have almost doubled in value, peaking at $25,500 earlier this month. Over the same period, the equivalent Panamax contracts also enjoyed a 99% gain, and are currently trading above $19,600.

Additions and removals

Lastly, on the supply-side, the year so far has been one of slowing fleet growth, despite strong rates disincentivizing owners from sending their ships to the scrap yards.

Last year’s jump in deliveries represented the peak of the most recent ordering cycle, and with the orderbook now thinning out, the pace of new ships joining the fleet is easing. As the first half draws to a close, we expect total dry bulk additions to settle at 19.1m dwt, 31% lower YoY. By sector, deliveries so far this year have been heavily skewed to the large Capesize designs, with 28 Newcastlemax and 8 VLOCs joining the fleet. Additions on the smaller sizes have been focused on the Kamsarmax and Ultramax segments.

Scrapping has remained low, but has been supported by the last of the VLCC-VLOC conversions exiting the market. Though these are relatively few in number, these units’ size means that their removals have a relatively high impact on total fleet supply. We expect total removals over the first six months of the year to reach 6.0m dwt, which marks an 11% decline on last year, but excluding the VLOCs, removals are likely to reach just 2.8m dwt, down by 28% YoY. Overall, the dry fleet has grown by 1.4% since the beginning of the year to 890.8m dwt, marking a 0.8% percentage point slowdown versus growth over the same period last year, which came in at 2.2%.

Looking forward, we remain cautiously optimistic that the current strength in the freight markets can be sustained for the next few months, as the typical seasonal tailwinds take hold and add to a market that is already running hot. At the same time however, we do expect a lot of the inefficiencies surrounding the pandemic to fade as we close out the year, slowly releasing pressure from some markets.