Macro-economic signals may be downbeat but bulker fundamentals remain encouraging
Here's the Executive Summary to our latest Bulk Carrier Market Outlook quarterly for Q3 2022 .
Click here to read the full report and get exclusive access to our seasonally adjusted five year forecasts for Capesize, Panamax, Supramax and Handysize Baltic Indices. And, just for Macro Macchiato readers who use the discount code HEATWAVE there is a 33% discount until the end of July.
Macro-Economics: Recession Warnings, but Inflationary Inputs Declining
The headline that China’s GDP grew by only 0.4% in 2Q22 is no surprise; the Covid suppression policy has economic consequences. China’s manufacturing PMI has ticked up in June as lockdowns ease. We are more concerned with the dire real estate data coming from China, the US, Australia and UK. In the OECD, business and consumer confidence are weakening. Central banks are concerned with inflation even as metals and oil prices start to fall. Bloomberg Economics predicts a 38% chance of a recession in the US in the next 12 months. Higher US interest rates are pressuring less developed nation currencies and capital markets. We think there may be a shallow recession in 4Q22 & 1Q23 and have reduced our GDP forecasts accordingly.
Supply: Sub 2% Fleet Growth in 2022
So far this year the bulk carrier fleet has grown by 1.4% led by 3.1% growth in the fashionable-again Handymax segment. 15 Mn Dwt of bulkers has delivered and only 2 Mn Dwt has been removed. Another 20 Mn Dwt is scheduled to deliver in 2H22, but the usual delays could reduce this to 16 Mn Dwt. We assume another 2 Mn Dwt of reluctant removals, which would give a maximum (if no delivery delays) of 2% fleet growth for the full year. The total or rebook stands at 66 Mn Dwt, or 7% of the fleet, led by 22 Mn Dwt of Capes, or 7% of the fleet, and 20 Mn Dwt of Panamax tonnage equal to 9% of the fleet. Deliveries stretch into 2025. There are limited opportunities for more deliveries before 2024 as the shipyards are blocked with container ships and gas tankers.
Demand: Up 1.6% in 2022 Despite Macro Concerns
China’s maturing urbanisation process puts question marks over long term demand growth for iron ore and all kinds of construction materials. But in the short term, commodity inflation appears to be moderating which may support demand growth, as might any further Chinese economic stimuli. Iron ore prices are tumbling from USD 160 in March to below USD 100 for November delivery. Volumes remain steady compared to last year. We estimate a 1% fall this year with upside potential. Non-ferrous ore shipments are at the lower end of the 5-year range having been volatile during the pandemic. Coal shipments are up as gas prices are prohibitive for electricity generators. Grain markets face Ukraine-based uncertainty but upside potential; tonne miles are down 15% in 1H22 y-o-y. Soybean trade was also lower in 1H22 and probably will be for calendar ’22. Forest products and minor bulk trades are up despite pandemic disruption. Overall we expect a 1.6% increase in bulk cargo volumes in 2022.
Outlook: Recession-Resistant Dry Bulk Freight Market
2Q22 average earnings were up by around 15% on 1Q22 for Panamax, Supramax and Handysize, and up 47% for Capesizes. But the trend since May has been downwards and July looks like underperforming July 2021. The question is, has the cycle peaked and are we going to have to abandon our ‘higher for longer’ scenario just a few months after adopting it? Or has it paused due to sentiment despite firm fundamentals? We incline to the latter view. Peak season is still ahead of us and supply moderation (even before slow steaming to reduce emissions) can prevent rampant overtonnaging.