DRY BULK QUARTERLY: Gloomy macroeconomic indicators may stall recovery

Dry bulk shipping may continue to face significant headwinds in the fourth quarter of 2022 on the back of geopolitical uncertainties, China's zero-COVID containment policy and a weak global economic outlook with recessionary risks sparking slowdown fears in key markets, and possibly stemming seaborne trade demand.

Over the third quarter of this year, time charter returns for all dry bulk sectorswere lower than the year-to-date average and only a fraction of the earnings witnessed during Q3 2021.

Platts Dry Bulk assessments

Source: S&P Global Commodity Insights

Market sources pinned the lower returns on shipowners and easing port congestions, emblematic of the COVID-19 pandemic era, which propelled freight to record highs in 2021.

"The rates are coming off as the shipping market is no longer facing congestion and labor [ shortage ] issues," a Hong Kong-based ship-operator said. Vessels, which would have been delayed at ports and anchorages, have begun to add to the available tonnage lists on key trading routes. The ample supply has made a notable dent in freight rates.

A shipbroker source observed that the reduction in turnaround time for vessels discharging in China also helped to re-supply fresh tonnage into the market quickly.

Overall, dry bulk demand continues to depend largely on China, which caters to almost 60% of demand by some estimates, despite the sprouting of new green shoots.

China's dogged 'zero-COVID' policy and its accompanying effects areshaking up the fundamentals in the dry freight market. Sources said the economic fallout has cast persistent negative sentiment and dampened demand. Sluggish consumption is evident in the real estate markets which draw in many seaborne dry commodities.

" China's procurement and economic activity is still key in supporting shipping rates," a second ship operator source said, adding that the Chinese economy was not expected to see a significant pick up until end-2022.

China's iron ore imports in 2022 have been marginally lower than volumes in 2021, a trend that is not expected to reverse for the rest of the year, while the Capesize segment's lackluster performance was attributed to the 2% drop in iron ore volumes on the Brazil-China route.

The first shipbroker felt there might be some pick up in spot market activity by the end of the year, right before the usual seasonal lull typically observed over Christmas and the Lunar New Year holidays.

Despite the predominantly negative short-term outlook held by many market participants, coal trade flows may remain healthy and support dry bulk rates to a certain extent, amid Europe's energy supply crisis caused by the Russia-Ukraine conflict.

"Coal demand will remain strong for at least another year," commented a third ship-operator. The source added that there was a significant increase in Russian coal imports into India since the onset of the Russia-Ukraine conflict.

Coal demand in Southeast Asia may remain steady, while market sources expect Chinese coal buying to stay 'sporadic' at best.

A bright spot in the sub-Capesize segment is the burgeoning demand in the seaborne movement of agricultural commodities, market sources said.

They also said that interest in hiring ships on period charters was waning, indicating a slow Q4 market as well as a seasonally lull first quarter.

"There are huge downside risks given the weakness in the market," echoed the second ship operator, who added that going long on tonnage at current period charter rates would place owners or operators under financial duress shouldthe market fall further.

While demand looks tepid in the immediate term, the impending supply of dry bulk ships are forecast to grow by only 3% over 2023.

"There has been less investment on building new vessels as asset prices have been high," a shipowner said. "The yards are filled with containers, LNG carriers with little spare capacity to construct bulk ships."