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Macro Macchiato: Don't Panic!

It has been a hard few weeks for Capesize operators. The Baltic Exchange’s Capesize 5TC index surged in September from USD 46,987 to USD 74,186, then stepped up further to USD 86,953 on 7th October…and that was the peak. By last Friday, the 5TC had stumbled to USD 51,463. The Baltic Dry Index inflated from 5,202 points on 1st October to a peak of 5,650 on 7th October and ended last week at 4,653, down 997 points. Losing 20 per cent a week puts the BDI firmly into correction territory.

Interestingly (for us) the retreat has been mostly in the Capesize segment of the market. While that was falling, the Baltic Handysize 7TC time charter average rose two per cent to USD 37,033 in the two weeks to 22 October, having put on weight since September when it stood at USD 33,457. The Supramax 10TC time charter average has gone up from USD 35,325 on 7 October to USD 39,421 on 22 October. The Baltic Panamax Index rose from USD 30,152 to USD 38,945 over the same fortnight.

Shipbrokers report that the correction in bulk carrier markets is the result of a clear imbalance between supply and demand is the cause. Is this the case?

Let’s look at supply first. According to our database, the supply of dry bulk carriers hasn’t changed much in the last month. September was the fourth busiest month so far this year for deliveries, with about 3.9 Mn Dwt delivering, while October looks set to be a quiet month with only around 2.0 Mn Dwt delivering. The average this year to September is 3.3 Mn Dwt of new deliveries per month. Of the nearly 6 Mn Dwt delivering over the September and October, only about 1.3 Mn Dwt is VLOC tonnage and Capesizes. So it seems unlikely that a sudden appearance of significant new tonnage has driven this plunge in bulk carrier freight markets.

How about demand then? As the Capesizes have been the first segment to retreat, maybe the iron ore markets are to blame.

Our data partners Oceanbolt publish monthly iron ore export volumes. In 2021 these have averaged 130 Mn T per month, of which 127 Mn T per month has shipped in Capesizes. Iron ore loadings peaking at 141 Mn T in August before falling to 134 Mn T in September and to 97 Mn T in the first 24 days of October, which we pro-rate to an estimated 122 Mn T for the full month. That would make October’s loadings some five per cent lower than August’s.

On 15th October, Rio Tinto cut its iron ore shipments forecast from Western Australia to the range of 320-325 Mn T, from its earlier 325-340 Mn T guidance, citing labour constraints. In Q3, Pilbara shipments were 83.4 Mn T, up nine per cent quarter on quarter and two per cent year on year. In Brazil, Vale’s shipments from Ponta de Madeira are down this year, while the company’s guidance updated export estimates to the lower end of this year’s plan for 315 to 335 Mn T of shipments. Basis performance so far, shipments could fall by five or six per cent in Q4.

Is that our smoking gun? Is that enough to cause Capesize freight rates to tumble 40 per cent?

It can’t be coal. Coal lifted in Capesizes has averaged 30 Mn T per month this year, with 22 Mn T lifted in the first 24 days of October, so we estimate a total of 28 Mn T for the full month, just six per cent lower than the average for the first nine months of the year.

Overall, Capesize cargoes are down in October by around five per cent month on month, with the tonne miles per cargo steady. That seems hardly enough to have caused the massive correction in freight rates, especially when freight rates for smaller ships have gone up.

Perhaps the answer lies in the iron ore markets. Tianjin 63.5% Fe content iron ore is priced at USD 120 / metric tonne today, down from a USD 129 in mid-October, itself a rally from USD 100.0 on 22 September, and altogether down from a peak of 229.6 per tonne on 12 May this year (data from Iron ore prices began to fall in July, so why did the Capesize market continue to rise until early October? Did the message take three months to get through?

Iron ore prices (right scale) and the BDI (left scale), data from


I think that the Capesize freight market has a big case of the jitters. Partly this is because of the news from China. After disappointing GDP figures for Q3 of 4.9 per cent growth compared to 7.9 per cent in Q2, investors have come to realise that China’s property sector is coming to the end of a 25 year boom which began when China’s urbanisation surged in the mid-1990s. Apparently there are 30 million empty properties in China, enough to house 90 million people.

The government used to be relaxed about excess housing, anticipating that it would be filled in time. However, demographics suggest that new family formation in China is peaking. The Evergrande liquidity crisis hints darkly at an overbuilt sector that by itself represents 30 per cent of China’s GDP, and uses half of China’s steel output. This is a long-term worry, with effects starting in the short-term.

Meanwhile, energy shortages in China are shuttering manufacturing plants, especially in the North, and the government has said that steel production will be capped this year at last year’s levels. This would necessitate a cut in steel production in Q4.

What we are seeing then is a pause in spot iron ore purchases while Chinese buyers sit out the remainder of 2021 and wait for policy guidance from the Forbidden City. To some extent, this is what we have got used to over the last few years. Seasonal patterns in the BDI show that it rises from a trough around Chinese New Year to a peak around Chinese National Day in October, before falling again. This time around, seasonality has come with an extra dash of Evergrande-flavoured uncertainty.

We should be careful about making long-term predictions based on short-term market movements. There is a lot of noise around the freight market signal at the moment, in particular due to economic disruptions in labour, energy and transportation, all caused by the pandemic, as well as policy noise in China as President Xi considers what to do about the property sector.

For now, I think the best advice for bulk carrier operators is not to panic. It may be that the strong markets which began in 2020 are coming to their peak and that the time to switch from ‘buy’ to ‘hold’ is approaching. But I see no justification for a market-wide sell off at this point. The supply side of the bulker market remains benign, with orders at multi-year lows while regulatory pressure is keeping owners away from the newbuilding markets. A five per cent reduction in iron ore shipments in Q4 is not going to sound the death knell for this market cycle – not by itself. There is time to sit on the side-lines for a few weeks and see what signals appear for market direction in 2021, after the seasonal lull around Chinese New Year.

To find out more, read our in-depth analysis in our Bulk Carrier Markets Outlook Quarterly, available here

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