Dry Bulk in 2020

A key part of our due diligence process, particularly in the presence of dated financials (or the complete absence of financials as is often the case), are the dynamics of the markets to which the counterparty is exposed. Due to its many challenges, the dry bulk sector one of our key markets. Our analysts have put together a festive prediction for 2020 below.


Capesize

What history commonly tells us is that history commonly tells us nothing in particular. With that ringing endorsement, despite the temptation to look at what happened in 2019 to give us some guidance for the future, it might be better just to start again at the start point for market analysis. And the default start position is iron ore for Capesize ships, accounting for 30% of trade and approximately 60% of Cape voyages. Although we’ve promised not to dwell on last year, if we mentioned the iron ore outlook without mentioning Vale and its tailings dams then something would be amiss. So . . . it turns out that the ultimate change in Brazilian exports as a result of the rolling ‘will they, won’t they’ Brucutu mine saga was very little change in total output. However, there is a large clearing somewhere in the Amazon rainforest that has resulted from the chopping of trees for the paper industry to print the endless reports on Vale’s next output move. So maybe it was the logs trade that benefited the most, as despite the temptation to buy the rumour and sell the fact, not a lot changed in iron ore supply.

What has changed in the iron ore sector was a brief spell when the prices rose to over $100 per mt for CIF China pricing for 62% fines. This meant that temporarily the miners in Mexico and other marginal suppliers got out the rolodex, thumbed to ‘M’ for ‘mug’ and looked for their old buyers again. It didn’t last, and the projection for 2020 for iron ore is easier to understand because of this. The major suppliers in Australia, South Africa and (yawn) Brazil still control the supply side. They are investing in new mines that produce at a lower per tonne price. Is this to increase production or is it to lower costs as demand dwindles and they look to offload high-production cost assets in the future? Time will tell, but the demand side outlook for iron ore remains every bit as average for 2020 as it was in 2019.

Coal is a bother for Capesize owners though. The spin on iron ore has not found its way into coal. Traditional coal traders are either reinventing themselves with green logos and pictures of happy children and forests on their website, or they are headed as far away from the light of environmental policy as possible. Signs that countries that traditionally use Capes to import their coal are rapidly going green are extremely worrying. China is taking steps, India is taking steps. Calling the top of demand for coal was an exercise for yesteryear, and ‘demand is declining’ is spoken of as a fact not an opinion. However, the problem for Cape owners is that continued coal trade is likely to be in countries and ports that don’t use Capesizes. So not only do owners have the headache of declining volume, but also the potential throb of the remaining volume sailing away on their little brothers.

As for fleet supply? There’s going to be more ships. But there’s always more ships. There’s going to be some scrapping, but this has proved a more elusive number to forecast than the lottery numbers. The Capesize fleet is young enough not to offer too much hope from scrapping (if it ever did), but the orderbook is apparently 10% of the fleet. It’s hard to get too excited about the prospects for Capesize ships in 2020, other than to say that while nothing of note happened to supply or demand in 2019 we still got to some pretty steamy numbers (albeit only for a short period). 2020? ‘Live in hope, but sell a rally’ seems to be the mantra.

Panamax

Well, there are less problems relating to key Panamax cargoes disappearing like the Capes have for a start. But there are different problems. Another conundrum that seems to have dogged the market is ‘what about this trade war?’. If truth be known, right next to the Vale-related rainforest clearance is an area twice as big, which the trade war between the US and China is responsible for. What are we all going to do all day when (if) it is over? What is great about the story is that it has brought uncertainty and volatility, but this uncertainty comes from those of us who are not working at a grain house. Grain and soybean prices in Brazil have been up, while in the US they have been down and there is definitely anecdotal evidence that shipments have not exactly stopped as a result of the trade war. In fact, the grains markets generally, while volatile (but when aren’t they?) are likely to remain busy.

One thing to consider in 2020 is that grain ‘seasons’ are having less and less impact on the Panamax market. This could be because they never really did, but everyone got so excited about them that they started acting irrationally. It could also be because of better storage and inland logistics. Whatever the reason, don’t expect grain seasons to move the market like they used to, but do expect people that never check this stuff to tell you that you’ve got to pay more/less as a result of them.

Coal, iron ore, grain, beans, potatoes, potatoes. Ultimately the variety of cargo in the Panamax sector is enough for it to avoid making 2020 a disaster in terms of demand. ‘Too many ships’ I hear you say. The orderbook is within historical tolerance not to spark a collapse, but not low enough to pop the champagne corks just yet. The outlook for Panamaxes generally appears to be less fragile than Capesizes, but not good enough to call it robust. Look out for more trade war news!

Handysizes to Supramaxes

Most analytics of the demand for shipping start to run out of steam at the point where Supras and smaller ships get discussed. That shouldn’t be too much of a surprise considering the temptation to talk a lot about iron ore usually uses up all the time and word count, but about a third of estimated demand goes into the error account also known as minor bulks. Supras and Handys also grab their fair share of ‘major’ bulks as well, so literally every cargo matters when analyzing this segment. A true analysis of the 50+ cargoes that can make up the ‘minor bulks’ outlook, which include anything from sugar to stones to pine nuts to petcoke, would be way too difficult to consider. So, as a good compromise, we lump them all in together and adjust them to give us a global GDP growth forecast of about 1-3% (depending on the audience I suppose).

When it comes to supply, let’s assume the following: there are a lot of Supras and Ultras on order for 2020 delivery. Let’s assume that the Handysize orderbook looks small by comparison, but also has an older fleet profile and longer per unit lifespan. Why assume that? Because it has always been so, and is so again for 2020.

In summary, stories of growth or decline in minor bulks will undoubtedly appear in 2020, but a step back from the wall and one might realise that these stories are rounding errors within the rounding error account. Cynical as that may sound, sales of bagged glucose due to the Tour de France would be similar in impact to many of the stories that are reported.

So, all that aside, the demand side looks at best average, but not due for collapse in 2020. Supply of vessels is going to be up. It will be extraneous factors that will most likely affect the market and as it is impossible to predict such a huge unknown, it is safest to say that we should again be ready for volatility, mostly caused by news-driven events. The rest? Well, we can’t say the rest is history now can we?

 

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Published on 24 Dec 2019

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