Dry Bulk and COVID-19 - Running on Empty

It is hard to find anybody who is prepared to underplay the impact of COVID-19 on the dry bulk market today.

No need to set a scene here, we all know plenty about it, particularly if, like most of us, you are now forced to work from home, whether you like it or not. What is clear is that with the virus in play, there is a strongly negative sentiment about the dry bulk market, the like of which is hard to remember since last time that all hope was lost in 2016.

When exactly did it become the case that all of the ills of the dry bulk market can be attributed to COVID-19? Dry bulk was either a lead indicator of what was to come or, in fact the ills of the market were upon us before the first mention of seafood markets in Wuhan. Taking the Capesize as the bellwhether market as the example, freight rates towered up to a tick over USD 38,000 on the Baltic 5TCs index on 1 September 2019. This was the highest it had been since it transitioned from the 4TCs in 2015. Obviously, if you quote an all-time high, the market goes down from there, but what is worth noting is that by the end of the year the index had fallen 68.5%, to close at USD11,976 by 29 December. It went straight down.

The most observant followers will notice that the Chinese government reported its first problems to the World Health Organisation on 31 December 2019. So to analyse this crisis for dry bulk shipping in the context of COVID-19 is assuming that the market could have stabilised the dropping rates from January onwards, meaning the virus discount could only effectively be from close to USD 12,000 to under USD 3,000, which does not make much sense.

So what is going on underneath the headlines of lockdowns, cancellations and closures? While using history to predict the future has brought about many a bogus assumption, at least what happened in the past is a real example of how things have unfolded before, and the Capesize market actually starts to make you believe again, if only a little.

The above table shows that for the past four years (if we assume that the 2020 low has not arrived yet) the annual low comes around about now. Each time the market has bounced it has done so decisively for the year in question. Noting that the downward slide came well in advance of COVID-19, it is natural to assume that the market may well have been as low as it is today without a global pandemic ie forgetting the ‘why?’ this is almost ‘business as usual’. For each of the previous troughs there are macro explanations that fit the narrative (of sentiment at least), when considering price alone. We would expect to be here or hereabouts right now. In fact, the general global issues for steel, coal and other major bulks are as bad as they have ever been, which is borne out by too many ships, not enough cargoes and seemingly no intention to pay higher rates. Justification of not paying more have been SARS, the Vale dam disaster, and whatever we can remember or think we can remember.

Near-term Outlook

The question remains though; what is the impact of the virus now and in the future for dry bulk markets? One question is that of travel and working from home. The markets have been this bad when we were all free to travel, so possibly there is no material impact due to lack of ‘face time’, although some adjustments will be essential. The issue feels less likely to be in the present, but the future. It is hard when a team is not necessarily used to working remotely to be able to gauge the appetite for putting large positions on in the market.

The defined, analysed and accepted links between COVID-19 and dry bulk shipping are few and far between. Why would we have the answers any more than the WHO for that matter? The postulations of how it is actually affecting things are present in every office worldwide, but no single narrative appears to be gaining traction. The only common ground remains that it is negative and by far the most dominant factor in current decision making. The recent closing of a steel plant in India and cancellation of coking coal imports is bad for those involved. It does not have any direct global impact though, but it perhaps gives some clues as to the underlying health of the sector if and when we take the COVID-19 conversation off of the table. If, for example, I did not want to buy any coal as my plant is losing terminal money I would blame it on COVID-19. Who wouldn’t? And the seller would tell his investors that his usual buyer had cancelled due to the virus. And this would be accepted as given.

Predictions based on understanding of a global pandemic have their obvious pitfalls, but if you are in the market to trade then you should at least have an opinion. Writing this view, when the world is in such flux is actually easier as anyone’s guess is as good as anyone else’s. However, it has allowed analysts and traders to get away from dams, stock piles, steel output, trade wars and all of the other ingredients that make up the daily grind of dry bulk shipping. Is there anymore bad news to come? Market theory often states that when there is no more bad news to come, then be bullish as the only thing that can change people’s minds is good news. So, the first signs of control of the virus might unleash buyers into the market like bears leaving hibernation in the spring and a sharp bounce could occur.

History suggests that this is a reasonable outlook. But once the bears are gone, then the reality of too many ships, not enough cargoes, if still true, needs to be addressed. Perhaps we can go past that part of the year and skip straight to a narrative of post-virus restocking? That is also a strong possibility. Let us take nothing away from the severity and the human tragedy that is unfolding which is truly enormous in scale, but its timing to coincide with what would be an incredibly weak market may be nothing more than a coincidence. And hopefully its abatement will come very soon to prevent more deaths. By that time the perceived seasonal dry bulk woes that are going on in the background could potentially also be passing, possibly with impact on ability to maintain balance sheet strength for the well-prepared and viable players, and staying afloat for the weak companies which had no headroom and ability to make adjustments.