【Comment】The outlook for the international dry bulk transportation market is optimistic

Shipping Reviews

In the first quarter of this year, the freight rate of the international dry bulk market rebounded, and the overall freight rate level of this year is expected to be higher than last year.

Freight rates stabilized and rebounded in the first quarter

After the international dry bulk market rebounded against the trend at the end of 2023, the freight rate in the first quarter of this year maintained a positive trend of stabilization and rebound. The Baltic Dry Bulk Freight Index (BDI) opened an upward channel in mid-February, breaking through 2,000 points after 12 consecutive gains, continuing the active market atmosphere at the end of last year, with a year-on-year increase of 80.4%, significantly better than the average of the same period last year. Market participants at all levels have also raised their expectations for the subsequent dry bulk transportation market.

It is expected that the international dry bulk transportation market will be stable and improving in the future, boosted by the economic recovery, high shipments and the expansion of capacity demand.

Multiple factors have helped the market improve

The rise is mainly due to the strong shipment of iron ore and grain, the increase in transportation timeliness and costs, and the hot atmosphere of the futures market.

The global manufacturing industry is expanding, and the off-season for seaborne trade is strong. With global inflation slowing down and the domestic market adhering to the general tone of seeking progress while maintaining stability, the world economy showed signs of stabilizing and repairing in early 2024, and the International Monetary Fund (IMF) raised the global economic growth rate for 2024 by 0.2 percentage points to 3.1%. Among them, the manufacturing industry was driven by strong expectations, and the global manufacturing PMI showed positive changes in March, rising to 50.3%, ending the operation trend of 17 consecutive months in the contraction range below 50%.

The economic rebound has been increasing, market confidence has continued to boost, and there are fewer seasonal disturbance factors, and the heat of seaborne trade has increased in the first quarter, with iron ore and grain shipments being the most obvious. Driven by the expansion of production capacity and the reduction of the impact of the rainy season, from January to March this year, the total global iron ore shipment was 380 million tons, a year-on-year increase of 4.4%. Among them, the increase in iron ore shipments from Brazil was the main driver, with a total of 74.316 million tons of iron ore shipped, a year-on-year increase of 14.1%.

In addition, China's stimulus policies at the beginning of the year supported demand for steelmaking raw materials, with domestic crude steel production and iron ore imports rising 1.6% and 8.1% respectively in January-February, data from the National Bureau of Statistics showed.

On the other hand, supported by a favorable climate and the acceleration of the global grain reserve process, South American grain-producing countries continued their high export momentum in 2023, with Brazil's total soybean exports reaching an astonishing 22.09 million tons in the first quarter of this year, an increase of 15.7% over the same period last year, setting a new historical record.

The traffic volume of the two major canals has decreased, and the detour has increased the cost of navigation. In 2024, the Panama Canal and the Suez Canal will continue to suffer from the dry water crisis and armed conflict. Since October 2023, the average precipitation in the Panama Canal area has decreased by 41% compared to the same period in previous years, seriously affecting the carrying capacity of the canal, resulting in the restriction of the passage of grain routes from the US Gulf to Asia and some grain routes from South America to Asia, with the daily traffic falling from 32 in July last year to 22, and in the first quarter of 2024 to less than 20%. At the same time, the average waiting time at canal anchorages this year is 40 hours, about double the normal level.

In terms of the Suez Canal, due to the continued tension in the Red Sea, and the Red Sea region and the Bab el-Mandeb Strait are on the only route through the Suez Canal, the armed conflict mainly affects the ore and grain routes from the Baltic Sea and the Black Sea region to Asia, and the transportation volume is not high compared with the global dry bulk shipping volume (3.5%), mainly through oil transportation to affect global oil prices to raise the freight level. As of the end of March, WTI and Brent crude oil futures prices closed at $83.2 per barrel and $87.5 per barrel respectively, up 16.4% and 14.2% respectively from before the outbreak of the crisis.

In order to avoid long berthing congestion and armed conflicts, ships that originally passed through the Panama Canal and the Suez Canal would choose to deviate as an alternative navigation option.

Ships that originally took the traditional Panama Canal chose to circumnavigate the Suez Canal to the east, increasing the distance by about 30%, 50% and 60% respectively.

The Red Sea crisis caused ships on the Middle East-Western Europe route to detour to the Cape of Good Hope in South Africa, increasing the actual transit time by more than 30 days, affecting the supply side of crude oil. Due to the lengthening of the distance between tons of nautical miles and the reduction of ship turnover efficiency, the cost of fuel consumption, labor, insurance and other costs has increased simultaneously, which has played a certain supporting role in the market freight rate.

The dry bulk forward freight agreement (FFA) is running at a high level, and shipowners are more sentimental. From the perspective of FFA of major ship types, the average spot rental prices of capesize ships, Panamax ships and Handysize ships in the first quarter were US$23,960.8 per day, US$15,452.7 per day and US$13,116.5 per day respectively, an increase of 147.4%, 31.6% and 24.2% year-on-year respectively. From the perspective of FFA in April, the daily trading prices of 5TC+1MON capesize ships, Panamax ships, and Handysize ships rose to $37,164 / day, $21,450 / day, and $17,033 / day respectively, an increase of 92.1%, 13.5%, and 0.2% year-on-year respectively, of which the FFA price of capesize ships in April was the highest in the past two years.

Affected by the high FFA price, the atmosphere of the chartering market is hot, the shipowners are confident and the price sentiment is strong, driving the capesize freight index to the highest level this year, and the average daily rent to the highest level in the first quarter since 2014.

The economic recovery provides support for freight rates

With strong global supply chains and a solid multilateral trade framework, the outlook for trade in 2024 is facing a positive turn. Based on signs of recovery in the trade sector in the first quarter, the WTO expects global trade in goods to grow by 2.6% in 2024, up 3.8% from 2023 (-1.2% in 2023). From the demand side, with inflation falling and geopolitical conflicts intensifying, the demand for commodities in European and American economies is expected to increase. Domestically, in the context of friendly policies and economic bottoming, exports have led to the improvement of manufacturing investment and manufacturing PMI. In addition, at the beginning of this year, infrastructure and manufacturing investment maintained a growth momentum, the decline in real estate investment narrowed, and steel exports continued to maintain a high growth rate, so it is not appropriate to be overly pessimistic about the demand for raw materials. Among them, the cumulative arrival of iron ore in 45 ports in China at the end of March was 246 million tons, an increase of about 17 million tons year-on-year, which was greater than the increase in ore shipments, indicating that domestic and foreign ore supply are actively shifting to the domestic market. On the shipping side, judging from the current shipment progress, new production capacity and shipping targets of major mines, the shipment volume of Australia and Brazil is still expected to increase, plus non-mainstream mining areas such as Guinea and Ukraine are gradually entering the traditional high shipment cycle, and iron ore shipments are expected to enter a boom cycle. At the same time, the route distance of grain and coal will also change with the ongoing war and conflict, and even cause a demand crisis, affecting market supply and demand, and accelerating the pace of shipment. In terms of available capacity, the Panama Canal is expected to normalize traffic until 2025, and the available capacity will continue to detour or wait for berth, coupled with the low growth of the global dry bulk fleet in recent years, which will further increase the future ship rental and second-hand ship prices. Judging from the BDI index FFA in August, the average value exceeded 2,000 points, indicating that market participants believe that dry bulk carrier freight rates will maintain a good level in the future. On the whole, the recovery of the global economy will provide support for dry bulk freight rates, and the increase in shipment increments and capacity demand will continue to stimulate the transportation market, and the overall freight rate level this year is expected to be higher than last year.

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