The BDI index continues to hit a 12-year high, and the dry bulk shipping market situation is arguably excellent. However, amid generally optimistic market expectations, uncertainty about the future of the Chinese market seems to cast a shadow over the prospects of the dry bulk shipping market.
Shipowners: The bulk carrier market will boom for at least 5 years
Due to a severe supply-demand imbalance, dry bulk freight rates are currently reliving the "glory days" of 2008, and an increasing number of bulk carrier owners are bullish on the dry bulk shipping market.
2015-2021 Baltic Dry Index (BDI) trend chart
Affected by the pandemic, the global economy has been hit hard. To promote rapid economic recovery, governments around the world have launched infrastructure plans. The United States passed a $1 trillion infrastructure bill, and India also plans to introduce an infrastructure plan worth $1.35 trillion. Clarkson estimates that global infrastructure spending is expected to reach $2.76 trillion this year, and will increase year by year, exceeding $3.3 trillion by 2031. Capesize vessels mainly transport iron ore, and infrastructure demand will boost the market demand for large bulk carriers.
On the other hand, abnormal climate has greatly increased food demand in many countries, which is favorable for small and medium-sized bulk carriers such as Panamax and Handysize vessels, which mainly transport coal, pulp, grain, wood chips, and other goods.
Singapore bulk carrier owner Berge Bulk CEO ames Marshall recently pointed out at a seminar that the boom in the bulk carrier market will last for two years. Marshall analyzed that the strong demand brought by the post-pandemic era, infrastructure in the United States and strong electricity demand in India, as well as low coal inventories in India and China, are all favorable to the dry bulk shipping market.
Wisdom Marine Chairman Lan Jun-sheng recently said that this year is the best year since the 2008 financial crisis. Because there will be very few new ships in the next two years, and the International Maritime Organization (IMO) will strengthen its carbon dioxide emission reduction policy in 2023, the shortage of ships will become more serious. In addition, the order book for bulk carriers remains at a low level. So far, the market still sees no ceiling, and it is estimated that the dry bulk shipping market will boom for at least five years.
The BDI index has been hitting new highs, and in addition to the sharp rise in the index, shipbuilding is also an important indicator of optimism about changes in shipping market conditions. Large shipping companies around the world are frantically scrambling to order new ships. This is a fact that cannot be ignored. At present, the earliest delivery for ordering a new ship is 2024, which also shows that most shipowners are optimistic about the future market.
Lan Jun-sheng said that none of these world-renowned shipowners would joke with shareholders' money, and they would not be so foolish as to build ships recklessly and want to be slapped in the face by the market. Market demand is a fact.
U-Ming Marine Transport General Manager Wang Shu-ji also pointed out that based on experience from 2008, it is not impossible for market prosperity to last 4-5 years, mainly depending on supply and demand. U-Ming believes that soaring infrastructure demand and limited fleet capacity will support bulk carrier freight rates. U-Ming said that the key to the continued increase in bulk carrier freight rates is that supply capacity is insufficient to cope with the steady growth of dry bulk trade volume. This is related to the historically low orderbook and expectations that environmental factors will accelerate the scrapping of older ship types. Currently, shipyard berths are filled with containership orders, and bulk carrier delivery schedules have been arranged until 2024.
According to Clarkson estimates, global infrastructure budgets are expected to reach $2.76 trillion this year, and will continue to increase year by year, exceeding $3.3 trillion by 2031. Accordingly, trade volumes of bulk raw materials such as iron ore, cement, and coal are also expected to increase year by year, and capacity demand will remain high.
Shipbrokers: Potential crisis in bulk carrier market prospects
But unlike shipowners, shipbrokers are clearly not optimistic about the future trend of the dry bulk shipping market.
Leading UK shipbroker Braemar ACM said in its latest report that official data showed China's steel output fell more than 12% in August to 83.2 million tonnes, the largest year-on-year decline since the global financial crisis. In absolute terms, August steel output fell by 11.6 million tonnes year-on-year, the largest decline on record. Braemar ACM described it as a "shocking signal from China."
The report said: "In the first half of this year, the Chinese government failed to meet its target of keeping production flat with 2020, and the intensity of capacity cuts over the past few months has far exceeded our expectations. Iron ore prices have nearly halved since May, and have recently fallen to their lowest level since last October."
Braemar ACM noted that, in addition, economic indicators including industrial output, infrastructure investment, retail spending and floor space under construction all recorded their weakest growth since the outbreak of the pandemic in early 2020, all of which cast a "question mark" over China's long-term dry bulk demand outlook.
Braemar ACM said: "After strong growth in the first half, the Chinese government appears keen to crack down on steel and other heavy industry to limit emissions. A key question is how strictly these measures will be enforced and whether they will begin to constrain economic growth." On the other hand, steel prices have remained stable and product demand remains firm. Although production has been severely restricted, "it is difficult to gauge how long politically motivated production cuts can last before steel mills try to raise output to take advantage of high prices."
Braemar ACM particularly stressed that the Capesize bulk carrier fleet and operators should be wary of the decline in China's major economic indicators: "The noticeable slowdown of the Chinese economy, coupled with instability in the real estate market, is a major risk in the long run."
George Lazaridis, head of research and evaluation at shipbroker Allied Shipbroking, holds a similar view, believing that the bulk carrier market carries higher risks in the long run. He pointed out that a potential crisis facing the dry bulk shipping market is that global investors are shifting funds from stocks and bonds to real assets (real estate, infrastructure, commodities, etc.). This move is mainly to combat inflation, which will boost demand for real assets in the short term, but will also inevitably push up asset prices and may lead to another capacity expansion cycle through increased newbuilding activity.
Lazaridis concluded that this period of asset price growth will continue at least in the short term, which will create many opportunities and also bring great risks. So far this year, ship asset prices have risen sharply and market sentiment has heated up rapidly, but once the potential of the secondhand ship market is over-exploited, risks will return. Given the current high uncertainty and the lack of strong long-term fundamentals to support the current freight boom, "we are rapidly moving toward a market mechanism that favors high-risk enthusiasts."
