The BDI has hit yet another 12-year high, and the dry bulk shipping market could hardly look better. Yet beneath the broadly optimistic expectations, future uncertainty in the Chinese market seems to have cast a shadow over the outlook for dry bulk shipping.
Shipowners: The bulk carrier market will stay strong for at least five years
With supply and demand severely out of balance, bulk carrier freight rates are currently reliving the "glory days" of 2008, and a growing number of bulk carrier owners are bullish on the dry bulk shipping market.
Baltic Dry Index (BDI) trend, 2015-2021
Hit by the pandemic, the global economy has taken a heavy toll, and governments around the world have rolled out infrastructure plans one after another to drive a rapid recovery. The United States passed a $1 trillion infrastructure bill, and India also plans to launch an infrastructure program worth 1.35 trillion. Clarksons estimates that global infrastructure spending could reach $2.76 trillion this year, rising year by year to more than $3.3 trillion by 2031. Capesize ships mainly carry iron ore, so infrastructure demand will help boost demand in the large bulk carrier market.
On the other hand, abnormal weather has sharply increased grain demand in many countries, a boon for small and medium-sized bulk carriers such as Panamax and Handysize vessels, which mainly carry coal, wood pulp, grain, wood chips and similar cargoes.
James Marshall, CEO of Singapore-based bulk carrier owner Berge Bulk, noted at a recent seminar that the bulk carrier market boom will last two years. Marshall analyzed that strong post-pandemic demand, US infrastructure needs and India's strong demand for electricity, as well as low coal inventories in India and China, all favor the dry bulk shipping market.
Huiyang Marine Chairman Lan Junsheng said recently that this year is the best since the 2008 financial crisis. With few new ships coming in the next two years and the International Maritime Organization (IMO) tightening its CO2 emission reduction policies in 2023, the ship shortage will worsen. With the bulk carrier orderbook at a low level, the market has so far shown no ceiling, and the dry bulk market is expected to stay strong for at least five years.
The BDI keeps hitting new highs, and shipbuilding is also an important indicator of the shipping cycle: major shipowners around the world are scrambling to order new ships, a fact that cannot be ignored. New ships ordered now cannot be delivered until 2024 at the earliest, which also shows that most shipowners are bullish on the future market.
Lan Junsheng said none of these world-renowned shipowners would joke with shareholders' money, nor would they be foolish enough to build ships recklessly and make themselves a laughingstock; market demand is a fact.
Wang Shuji, General Manager of U-Ming Marine Transport, also pointed out that based on the experience of 2008, it is not impossible for a market boom to last four to five years, mainly depending on supply and demand. U-Ming believes that surging infrastructure demand and limited fleet capacity will support bulk carrier freight rates. U-Ming said the key to further increases in bulk carrier freight rates is that capacity supply is insufficient to meet the steady growth in dry bulk trade volume, which is related to the orderbook remaining at historic lows and expectations that environmental factors will accelerate the scrapping of older ship types. Shipyard berths are currently full of container ship orders, and bulk carrier order deliveries are already scheduled into 2024.
Clarksons estimates that global infrastructure spending could reach $2.76 trillion this year, rising year by year to more than $3.3 trillion by 2031. Trade in bulk raw materials such as iron ore, cement and coal will accordingly grow year by year, and capacity demand will remain high.
Shipbrokers: Potential crisis in the bulk carrier market outlook
But unlike shipowners, shipbrokers are clearly pessimistic about the future direction of the dry bulk shipping market.
In a newly released report, well-known UK shipbroker Braemar ACM said official data show China's steel output fell more than 12% in August to 83.2 million tonnes, the largest year-on-year drop since the global financial crisis. In absolute terms, August steel output fell 11.6 million tonnes year on year, the largest decline on record. Braemar ACM described it as a "shocking signal from China."
The report said: "In the first half of this year, the Chinese government failed to meet its target of matching 2020 output, and capacity cuts over the past few months have far exceeded our expectations. Iron ore prices have nearly halved since May and recently fell to their lowest level since last October."
Braemar ACM noted that beyond this, economic indicators including industrial output, infrastructure investment, retail spending and floor space under construction all posted their lowest growth since the pandemic broke out in early 2020, all of which have put a "question mark" over the long-term outlook for China's dry bulk demand.
Braemar ACM said, "After strong growth in the first half, the Chinese government appears keen to crack down on steel and other heavy industries to limit emissions. An important question is how strictly these measures will be enforced and whether they will begin to constrain economic growth." On the other hand, steel prices remain stable and product demand remains firm, and although output is severely restricted, "it is hard to gauge how long politically motivated production cuts can last before steel mills find ways to raise output to take advantage of high prices."
Braemar ACM particularly stressed that Capesize bulk carrier fleets and operators should watch for the decline in China's main economic indicators: "China's economy is clearly slowing, and together with instability in the real estate market, this is a major risk in the long run."
George Lazaridis, Head of Research and Valuations at shipbroker Allied Shipbroking, holds a similar view, believing there is high risk in the bulk carrier market over the long term. He pointed out that the potential crisis facing the dry bulk market is that global investors are shifting funds from stocks and bonds into real assets (real estate, infrastructure, commodities, etc.). This move is mainly to fight inflation and will boost demand for real assets in the short term, but it will inevitably push up asset prices and may lead to another capacity expansion cycle by increasing newbuilding activity.
Lazaridis concluded that this period of asset price growth will last at least in the short term, which will create many opportunities and also bring huge risks. So far this year, ship asset prices have risen sharply and the market has heated up rapidly, but once the potential of the secondhand ship market is overexploited, risk will return. Given the current high uncertainty and the lack of strong long-term fundamentals to support the current freight boom, "we are rapidly moving toward a market regime that favors high-risk enthusiasts."
