25-04-2017

Good days ahead for the global dry bulk market

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There could be no looking back for the Baltic Dry Index (BDI) hereon. Hovering around 1300 levels at present, this freight index, which measures the price of shipping majors’ raw materials, is expected to move only northwards in the coming months. With global dry bulk traffic set to increase on select routes and discarding of old vessels only on the rise, BDI could have a smooth and steady uphill journey.

Experts are of the view that US president Donald Trump’s policies on pollution norms and thrust on coal production in the world’s largest economy would have a significant impact on dry bulk trade on the trans-Atlantic route. The earlier Obama administration, for environmental safety, had enforced a moratorium on coal leases and also asked coal mining companies to avoid mining practices that harm the environment. Last month, President Trump signed an order rolling back a temporary ban on mining coal and a stream protection rule imposed by the Obama administration.

Europe has been the largest consumer of US coal. However, according to the latest US Energy Information Administration report, the country’s coal exports to Europe have declined 28 percent in 2016 on a year-on-year basis.

“Amid Trump’s new climate and energy order and his talks of repealing climate convention, it will be interesting to see how the Europe-US coal trade pans out if the US increases its coal production significantly,” said Rahul Sharan, lead research analyst with London-based Drewry Shipping Consultants.

Coal and iron ore are the major commodities of global dry bulk trade. Coal constitutes one-third of total dry bulk trade, while iron ore forms two-third of it.

Meanwhile, though Brexit has been an important development on the global map as far as trade equations are concerned, dry bulk trade is not expected to get affected.

“Britain has not been a major influence on the global dry bulk market. UK’s share in the dry bulk market is less than one percent, due to this, Brexit is not going to have any impact on dry bulk trade at all,” explained Sharan.

Moving towards Asia, experts are of the view that trade links from China would be most crucial for the global bulk market as the dragon country contributes about two-third of world’s dry bulk trade.

Though China, the world’s second-largest economy, could be impacted by protectionist measures if President Donald Trump sticks to his campaign pledges to brand the country a currency manipulator and impose heavy tariffs on imports into the US, the dry bulk will remain insulated as the US is not a major importer of Chinese products in dry bulk industry.

Meanwhile, as China aims to spend over $2 trillion between 2016 and 2020 to expand and improve its railroads and highways, demand estimates for the dry bulk commodity from the country has shot up significantly. As part of the country’s 13th five-year plan, spending target has moved to $2.17 trillion from $180 billion in the 12th five-year plan (2011-2015).

During January-March 2017 quarter, China’s iron ore imports grew nearly 10 percent from the corresponding period last year. In 2016, Chinese iron ore imports grew significantly crossing one-billion tonne mark even as the government came down heavily on excess capacity in the domestic market. “The shut-down was mainly on low-grade producers which used scrap metal and hence, demand for iron ore requirement was not hurt,” explained an analyst with a local brokerage.

While the pick up in coal and iron ore trade, the key commodities that drive global dry bulk market, is expected to take care of the demand side of vessels, continuous demolition of vessels is likely to correct the much needed demand-supply imbalance in the global market. This, in turn, is seen bringing down oversupply of vessels as a percentage of demand.

“A lot demolition has already happened from 2014 to 2016 and in 2017, we expect supply will contract and, demand for newer vessels to grow faster. This means freight rates should keep improving now onwards,” said Sharan of Drewry.

Age of the vessel and future earnings estimates were the main reasons why demolition increased in last 2-3 years, said industry officials. “Owners were in a complete cash crunch and were running in losses in 2015 and 2016. No one was ready to buy vessels and so have had to demolish,” explained Sharan.

Alongside, with International Maritime Organisation (IMO) coming up with two stricter regulations to protect the environment (one to get effective in September 2017 and another in 2020), demolition activity of vessels will only enhance in coming years. (see chart: Source Drewry Shipping Consultants).

All in all, it seems that good days lie ahead for the global dry bulk market.

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Source: Business Standard

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