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This may be the end of the bulk carrier lockdown party, but not of the cycle

Macro-Economic Uncertainty

We may not be home and dry when it comes to getting out of this pandemic, but we could be home and vigorously towelling ourselves down. Stock markets expect a recovery in economic activity as the pandemic is declared over and the virus becomes endemic. But geopolitical risk, rising inflation and central bank indications of forthcoming interest rate rises all cloud the geopolitical outlook and have given stock markets pause for thought in January. China’s slowly imploding property market may derail demand for steel and construction materials, both of which will fall under China’s carbon trading system this year. Chinese PMI's came out at 50.1 for January, barely growing. These factors may all affect bulk carrier demand, which is still heavily dependent on Chinese GDP growth. However, our favoured leading indicators suggest nothing worse than a post-lockdown return to normality (whatever that was) and certainly no recession. The lockdown party in bulk freight might be over, by which we mean that inefficiencies which restricted fleet supply may ease this year. Nevertheless the fundamentals of supply and demand remain in ship owners' favour.

Bulk Carrier Supply: Commendable Discipline

The fundamentals of the bulk freight market remain solid, particularly on the supply side. A shortage of shipbuilding capacity, high newbuilding prices and continuing uncertainty over the best low-carbon fuel solution to choose are all holding back newbuilding orders, presumably for all the latent demand to bubble up later this decade. 306 bulkers were ordered in 2021, 100 of them in the final quarter, with around a quarter having some form of low carbon technology specified. 37.0 Mn Dwt delivered last year and 7.0 Mn Dwt was removed; the fleet grew by just 3.4% to 930.8 Mn Dwt. Scheduled bulker deliveries currently are 20 Mn Dwt for 2022 and 17 Mn Dwt for 2023. We might see more deliveries next year but this year is essentially baked in as a low growth year for supply of just 2.1% before removals. There won't be many of those, but let's pick 2.0% fleet growth as a reasonable number for 2022. This will be the lowest since the global financial crisis.

Demand: A Return to ‘Normal’ Growth Levels

Although we have slightly downgraded our GDP forecasts, we still have positive bulk carrier demand forecasts for this year. Total seaborne bulk volumes grew 7.6% in 2021 to to 6.4 Bn T from 6.0 Bn T in 2020 and exceeded the 6.2 Bn T recorded in 2019. Tonne miles were flat at 24.0 Tn in 2019, 23.7 Tn in 2020 and 23.8 Tn in 2021. But when converted into ship 'activity' (you might say, productivity), growth rates were around 10% overall and 15% for Capesizes. Seaborne iron ore grew from 1,564 Mn T in 2020 to 1,590 Mn T in 2021. This is now a mature market but there is still room for growth. Coal shipments grew 6% last year to 1,828 Mn T. Steel and scrap cargoes were up 14% from 175 to 200 Mn T year on year. Grains were down 2% from 614 Mn T in 2020 to 603 Mn T in 2021. Non-ferrous metals, minerals and ores rose 4% from 431 Mn T in 2020 to 450 Mn T in 2021. Seasonal patterns suggest a return to chartering activity after Lunar New Year and across the range of cargos we should see ‘normal’ volume growth of around 4% to 5% in 2022 – well ahead of supply growth expectations.

Outlook: This Cycle Is Not Over Yet

The Lockdown Party may be over for bulk freight markets. The rebound from 1H 2020’s public health measures sustained a 19 month bull market which peaked as our last report went to press. That rebound is now over but the fundamentals of supply and demand suggest that this year, not last year, will represent the peak of this cycle, with minimum 4% demand growth and maximum 2% net fleet growth.

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