Subdued China recovery dampens Q3 dry bulk shipping prospects

Global macro-economic weakness may pressure the dry bulk freight market during the third quarter of this year, which would be an extension of lower returns witnessed in the previous quarter due to China's sluggish economic recovery and weak commodity demand.

The Platts Capesize T4 Index, a global ton-mile weighted average index of four Capesize routes, stood at an average of $14,481/d in Q2, down from an average of $17,848/d in Q2 2022, S&P Global Commodity Insights data showed.

Similarly, the Platts KMAX9 Index, a global ton-mile weighted average of nine Panamax routes, was at an average of $11,598/d over Q2, significantly lower from $25,525/d across the same period in 2022, and the Platts APSI 5 Index, a ton-mile weighted average index of five Supramax routes within the Asia-Pacific, was at an average of $9,580/d over Q2 2023, a huge decline from $25,814/d over Q2 2022.

The majority of shipping sources lowered their expectations for the current quarter, which historically has seen demand perk up for coal, iron ore and grains.

"There is continuous anticipation that China will come up with some stimulus and that will increase transportation demand which I think is a flawed assumption," a ship-operator source said. "It is important to understand that China is moving away from being a manufacturing economy."

Apart from that, Chinese economic performance was relatively lackluster, and this dampened sentiment and consumer spending, leading to lower demand for goods.

"China is not [likely to] import as much [raw materials] due to a weak real estate demand," a Singapore-based ship-operator source said, suggesting that lower commodity import volumes by China would negatively impact shipping activity and depress rates.

All these factors resulted in ships looking for new employment on the back of swift turn around at Chinese ports. Sources said this trend may not to change in the coming months. Also, the lack of congestion, which holds up ships, and better tonnage supply are pulling freight rates lower.

Capesize, Panamax - lacking coal cargoes

The Capesize segment continues to expect support from increased iron ore cargoes out of Brazil despite Chinese steel margins hovering around zero or lower for most of 2023.

With better weather, the production and export of Brazilian iron ore usually picks up pace during Q3. But lack of competing demand for these ships from reduced coal movement, was a cause of concern, market sources said.

Supramax and Panamax rates have suffered negatively due to containerized cargoes returning to boxships compared with 2021 and 2022.

"Handysizes and Supramaxes had to compete for coal cargoes now [in 2023], compared to 2021 when [coal] was mostly moved on Panamax ships," the second ship-operator source said.

The competition for coal stems resulted in Panamax ships getting fewer coal cargoes to move and thereby causing an intense competition for cargoes among shipowners in the Pacific.

Warmer climate may support coal demand

In addition, the slower-than-expected recovery in Chinese manufacturing and production activity led to lower energy utilization, which in turn reduced demand for coal usage.

"Producing energy for daily consumption is the main factor [that supports] coal demand [in China] now," a third ship-operator source said.

Market participants also pointed out that higher Chinese and Indian domestic coal production has trimmed seaborne coal movement to an extent, resulting in subdued shipping rates.

Despite the dampened expectation for Q3, some dry bulk market participants are optimistic that freight rates may improve due to seasonal factors such as East Asia's warmer summer season boosting seaborne coal demand to cater to higher energy consumption.

Also, the dwindling dry bulk newbuilding orderbook may limit the tonnage supply and to a certain extent, lend support to the dry bulk market.