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Would you buy a Capesize bulker today?

Updated: Feb 24

There has been a Capesize S&P “frenzy” so far in 2024, as one shipping paper put it as it reported the sale of the 181,400 Dwt, 2014 built True Cartier to German bulker royalty Oldendorff for a chunky USD 41 million. If true, the price exceeds the USD 40.5 Mn that JP Morgan reportedly paid to acquire the ship in 2019.  During February, NYSE listed Genco has sold two older Capesizes for a combined figure of around USD 48 million. Greek owner Thenamaris has bought four Newcastlemax bulkers from Polaris Shipping of South Korea paying more than USD 67 million each for the 2020 built pair Solar Pride and Solar Quantum and the 2021 built pair Solar Nova and Solar Oak. Apparently there were more than 10 bids for these modern units.

The bullish sentiment in the Capesize sale and purchase market can be interpreted as confidence in the freight market outlook for the next few years. And as readers of our dry bulk forecast reports will know, we agree with that forecast. The freight market cycle has reset and is likely to start climbing this year to a peak next year or even in 2025.

The year has started well if not spectacularly. Average Capesize earnings in 2024 to date, basis the Baltic Exchange, are around USD 20,300 per day. Last year the average daily hire rate for Capesizes for January and February was USD 6.400. In 2022 it was USD 19,100 and in 2021 it was USD 13,100.

Seasonality usually makes January and February the weakest months in the bulk carrier calendar due to Lunar New Year in Asia and particularly in China as industrial activity slumps for two to three weeks. This year, China is free from struggles with Covid-19 lockdowns. If the Capesize market behaves according to its usual seasonal pattern this year, earnings in Jan and Feb should be around 50% of the annual average while the peak is usually in October at around 140% of the annual average.  Should we get ready for average Capesize earnings of $40,000 a day this year and a peak of $55,000?

Well, maybe the new owners of these ships will get to enjoy a rising market. But an investment in a second hand vessel is usually a five to ten year engagement, so the new owners have to take a view about how the  markets will develop out to 2030 or beyond.

On the positive side of the ledger, there is the small orderbook to be thankful about. According to industry database SeaWeb, the standard Capesize fleet numbers 1,116 ships of just under 200 Mn Dwt. The orderbook is only 23 ships of 4.2 Mn Dwt, just 2% of the fleet by capacity.

There is also the emissions factor to consider. If every ship slows down to improve is Carbon Intensity Indicator score, then available Capesize tonne mile days will be cut commensurately. If laden speeds fall 10%, then effective fleet supply falls 10%. Utilisation will rise and earnings will go up accordingly. 

Over the coming five years a number of older Capesizes will presumably score D or E on their CII for more than two years, leading owners to consider investing to improve their scores or scrapping the ships. If freight rates are buoyant, it may be worth investing in non-fuel technologies such as  voyage optimisation software, rotor sails, Mewis ducts, fuel cell generators, or air lubrication, all of which can save a few per cent on fuel consumption and thus on emissions. Maybe CO2 scrubber technology will improve beyond current single figure percentage efficiency.  For the rest, ship owners will have to rely on biofuel blends to cut their well-to-wake emissions.

After 2030, environmental regulations are going to make life more expensive for most ship owners. It would be preferential for any purchase at this point to be able to pay off the ship by 2030. That’s six years to earn USD 48 Mn on the True Cartier or USD 8 Mn Year.  Eight million a year is about USD 21,900 a day, and opex of around USD 10,000 a day has to be added to that.  Assume a USD 6 Mn resale value for an 18 year old Capesize and the required income after opex is USD 18,250 a day.  Add USD 10,000 a day for opex and, before interest or the cost of money, the ship needs to generate at least USD 28,000 a day over the cycle.  Since 2014, the Baltic Exchange 5TC Capesize average daily hire rate is USD 16,300. Of course, most owners will buy their ships with debt attached, so the return on capital is a slightly easier calculation than this here which assumes 100% equity – but doesn’t include any interest payments.

The last four bulk carrier freight market cycles have lasted four years. If the next two cycles last four years each, then the new owners of these Capesizes stand a chance of hitting two market peaks by 2030.  There is at least a chance then of trading the ships and exiting at a high point in the asset cycle when market prices profitably exceed book values.

There is one issue which concerns me when looking at an investment in Capesize bulkers. And it is a biggie.  Capesizes spend 95% of their time transporting iron ore. That means they spend most of their time sailing between Brazil and China or Australia and China. China is the world’s biggest iron ore importer, producer and consumer. It needs the iron ore to make steel.  That steel largely goes into real estate and infrastructure. Those two sectors consume two thirds of Chinese steel production. And what condition are they in at the moment?  A two word summary could be Not Good.

There are 30 million or more unsold residential units in China. And nobody is going to buy those because the population is shrinking. The unemployment rate for 16-25 year olds is so high that the government has stopped publishing the data. Wage growth is stalling.  The government has instructed state owned enterprises to muster their own militias to assist with social control – a tradition allowed to lapse in recent decades.

In the coming 20 years, China will add 68 million fewer consumers to the population than in the last 20 years – about the equivalent of the entire UK population. 321 million Chinese are aged 0-19, compared to 389 million aged between 20 and 39. There are also 44 million more males than females aged under 40, which cuts the procreative pool further.  Without consumers and workers, China’s steel demand will go into reverse.

Moreover, the National Development and Reform Commission says that by 2030, as much as 30% of China’s steel production must be recycled steel. That means that 30% of virgin steel production will be shut down in the coming six years. I expect that as older, less efficient steel mills reach their end of their lives, they will be shut down and replaced by electric arc furnaces.  

If the NDRC gets its way, and if the working population falls, then the first thing to go by the board in the steel supply chain will be domestic iron ore mining. Output stumbled by as much as a quarter during the pandemic. It may never return to pre-pandemic levels, especially as domestic iron ore is so poor in quality that it requires expensive and polluting beneficiation to be useable in a blast furnace. The mining lobby is strong in China, but young people don't want to be miners, they want to be Tiktok influencers.

The next thing to fall, perhaps not for a few years yet, will be iron ore imports. But a glance at the chart at the top of this post will show you that the 20 year boom in global iron ore trade and Chinese iron ore imports was stopped in its tracks by Covid-19. The pandemic may also come to be seen as the punctuation mark at the end of China’s generational process of urbanisation. Over 400 million urbanites have been created since 1980. The process is maturing.

The twin process of industrialisation is also maturing. China’s export markets are struggling with their own slow growth. They are also choosing other locations on the supply chain. Friendshoring, nearshoring and reshoring are real political and industrial trends now. In July 2023, Mexico overtook China as the primary source of exports to the US. China is banking on low carbon exports of items like electric vehicles and solar panels. But neither of these is a big user of steel components, and major export markets like the EU are introducing tariffs such as putting shipping into the Emission Trading Scheme or imposing the EU Carbon Border Adjustment Mechanism. Meanwhile, Donald Trump says he will put a 10% tariff on all imports, whatever their origin, in the first days of his administration (should he win the election in November).

China is investing in iron ore production overseas including its commitments in Simandou in Guinea. At first glance, this looks positive for Capesize demand but the question is, whose Capesizes? Shipping the ore may be controlled by Chinese operated vessels with freight paid in RMB as China seeks to rely less on USD transactions.

80% of global iron ore shipments are performed by Capesizes which dominate the trade from Brazil and Australia to China. Smaller ships, especially the geared ships, are used on particular trades, such as a few ice class Supramaxes which trade out of northern Canada to China.  But overall, flatlining iron ore trades will impact Capesize freight markets far more than smaller bulker freight markets. Perhaps a loss of demand growth or even falling iron ore shipping demand will be more than offset by an effective reduction in fleet capacity…but would you bet on ship owners breaking with tradition and not go ordering new ships when freight rate prospects are so rosy and second hand prices so juicy?

The Take Away:  I’m not saying don’t buy a Capesize. But I am saying, keep one eye on the major source of demand for this ship type. The Middle Kingdom has serious structural and demographic issues with its economy. We can’t assume eternal growth – especially after two decades of unprecedented increases in trade and even more so in the light of global trade and geopolitical difficulties.

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