“The recovery is on its way,” proclaimed one analyst, speaking about the dry bulk sector … in 2014.
“The trough is now squarely in the rear-view mirror,” said another a half-decade ago. “Prepare for a two-year cycle with earnings likely to peak in 2015.”
As it turned out, dry bulk earnings set fresh lows in early 2015, came up a little, then crashed to an all-time nadir in early 2016. Sentiment recovered by 2017, a year when commentators said, “People see the light at the end of the tunnel.” “There’s electricity in the air – the dry bulk market is once again on the rise.” “The sector remains highly attractive with strong outlook for next year.” “Dry bulk is poised to accelerate!”
Dry bulk didn’t accelerate in 2018 and rates plunged further in early 2019, down to as little as $5,000 per day, before finally rising to multi-year highs in August and September.
Today’s upbeat rhetoric has a familiar ring to anyone who has listened to dry bulk executives and analysts over the decade since the financial crisis. The consensus outlook calls for a recovery next year after a traditional period of seasonal weakness in the months ahead. Some would even say that a sustainable recovery has already begun.
Rates and stock moves
According to Clarksons Platou Securities, rates for larger Capesize vessels – bulkers with capacities of 100,000 deadweight tons (DWT) or more – averaged $24,900 per day on Friday, October 15, flat week-on-week and down 14% month-on-month. Capesize rates peaked at $37,500 per day on September 4.
Rates for Panamax bulkers (65,000-90,000 DWT) averaged $14,500/day, down 11% month-on-month, and Supramaxes (45,000-60,000 DWT) averaged $13,200 per day, down 9% month-on-month.
Publicly listed dry bulk stocks are holding up well despite the pullback in rates since September, implying optimism on the part of investors. Shares have posted significant gains since their lows earlier in the year. Since March 1, the stock of Scorpio Bulkers (NYSE: SALT) is up 71%, Star Bulk (NASDAQ: SBLK) is up 53%, Golden Ocean (NASDAQ: GOGL) is up by 23% and Safe Bulkers (NYSE: SB) by 21%. The best performer in the sector is not a ship owner, it is the Breakwave exchange-traded fund that buys dry freight futures (NYSE: BDRY), up 80% since March.
Current market drivers
During the recent conference calls for Safe Bulkers and Scorpio Bulkers, executives cited a number of positive drivers in the current marketplace.
For Capesize vessels, there are at least two tailwinds. First, Brazilian miner Vale continues to increase long-haul iron-ore shipments to China after disruptions waylaid significant volumes in the first quarter. Second, a significant number of Capesizes are currently out of service for installations of exhaust-gas scrubbers to comply with environmental rules coming into effect on January 1; lower effective capacity is a plus for spot rates.
For Panamaxes and smaller vessels, the strength of Brazilian agribulk exports to China has been a positive, as the sailing distance from Brazil to China via the Cape of Good Hope is longer than the route from the U.S. Gulf to China via the Panama Canal. U.S.-China trade tensions have shifted the soybean export trade towards Brazil.
Meanwhile, coal is a key cargo for Capesizes as well as Panamaxes and executives highlighted strong transport volumes for this commodity – both to China and India.
Prospects and caveats
The “Devil’s Advocate” response to the latest wave of dry bulk optimism would be to ask, “Why are headline Capesize rates down 34% from the September high? How sustainable are the current positive drivers? And why should investors believe a sustainable recovery will actually take hold in 2020 when their hopes have been dashed so many times before?”
Evercore ISI shipping analyst Jon Chappell sounded a cautious note in his latest sector outlook, published October 22. He didn’t urge clients to sell their stocks, but he did opine that the “easy money has been made” from the recent appreciation of dry bulk shares.
On the plus side, he explained that “favorable rate momentum through the third quarter and early fourth quarter confirms that the previously disrupted iron-ore trade is returning to a state of normalcy, and if major producers want to meet output guidance ranges for the remainder of this year, there must be further re-acceleration of production and exports.”
For grains and coal, however, the near-term outlook is not as positive. “Although South American [grain] exports have once again served as a substitute for more expensive U.S. exports, after tariffs, the calendar is once again approaching the time of year when the U.S. harvest cannot be fully offset by Argentinian or Brazilian exports,” said Chappell, adding that the recent Chinese pledge to buy U.S. soybeans is “still somewhat theoretical.”
He continued, “The pace of Chinese coal imports continues to run well ahead of last year, which would be viewed as a positive, except for the fact that in 2018, strong year-over-year import growth ground to an immediate halt in the last two months of the year as the nation attempted to adhere to a full-year quota. That quota is again in place this year, at an absolute level, meaning that the coal trade could be abruptly disrupted again in the last two months of 2019, a scenario that already provided ill effects on dry bulk spot rates in 2018.
“So yes, the market is improving, but the directional shift is far from riskless,” Chappell cautioned. “Although we believe that the worst of the recent dry bulk downturn is certainly in the rear-view mirror, our view of the ‘recovery’ is far from a straight line up, with quarter-to-quarter volatility likely to remain a staple of rate trends in this market.” More FreightWaves/American Shipper articles by Greg Miller