It has certainly been a tumultuous year for dry bulk. Will it end with a whimper, or is there still time for one more reversal of fortune?
Rates are now just over half the levels seen in early September and back to where they were in late June, and iron-ore giant Vale (NYSE: VALE) has just cut its sales forecast, dealing dry bulk another blow.
The most important market for Capesizes — bulkers with capacity of 100,000 deadweight tons (DWT) or more — is the iron-ore trade from Brazil to China. It is both high volume and very long: three times the distance as the Australia-China run.
Vale initially estimated it would sell 307 million-322 million tons of iron ore and pellets in full-year 2019. On Oct. 21, Vale reaffirmed that estimate but cautioned that the final tally would likely fall in the lower half of that range. On Nov. 11, it cut the outlook further, to 307 million-312 million tons.
"Vale is a significant player in the market and without a recovery from them, dry bulk cannot really thrive," said John Kartsonas, founder of BreakWave Advisors, in an interview with FreightWaves. His company created the BreakWave Dry Bulk Shipping ETF (NYSE: BDRY) to allow investors to more easily wager on dry bulk rates.
"I'm still optimistic, but fundamentally, the market is not as strong as I would have expected it to be three months ago, because Vale is not really delivering," Kartsonas said.
Rate Slide Since September
Clarksons Platou Securities estimated that Capesize time-charter-equivalent (TCE) rates had fallen to $19,700 per day as of Friday, Nov. 8, down 20% week-on-week and 48% below the Sept. 6 high of $37,600 per day. Rates for Panamaxes (65,000-90,000 DWT) were assessed at $11,300 per day on Nov. 8, down 14% week-on-week and 43% below the Sept. 4 high of $19,900 per day.
Rate assessments by the Baltic Exchange pointed to further declines on Monday, Nov. 11, with new estimates for Capesize rates at $19,390 per day and Panamax rates at $10,007 per day. The Baltic Dry Index is now down to 1,345 points, its lowest level since June 27 and down 47% from its Sept. 4 high of 2,518. The Baltic Capesize Index is at 2,393 points, its weakest level since June 28 and down 50% from its Sept. 4 high of 5,043.
S&P Global Platts administers indices that track the dry bulk market with a different methodology than the Baltic Exchange. The Platts indices show the same downward trend. As of Nov. 11, its Cape T4 Index was estimating a TCE of $20,091 per day, a 17% decline from the estimated rate on Oct. 1, when the index debuted.
Kartsonas put the slide in rates since early September into context. "Rates are always going to go up and down. That's the way shipping works," he said. "But if you have higher highs and higher lows, that's a good thing. If the high [for Capesizes] is $40,000 a day and the low is $20,000 a day, that's actually a great market. If we bottom at $20,000 a day, it's party time — the breakeven is in the low teens." The problem, of course, is if Capesize rates push through that floor and keep tumbling .
Volatile First Three Quarters
To recap the wild swings of the first through third quarters of 2019:
Following the tragic Brazilian dam disaster in late January, which closed mining operations and drastically reduced iron-ore exports to China, Capesizes rates plunged. In the Panamax segment, trade tensions slashed exports of U.S. soybeans to China via the Panama Canal. Instead, China bought soybeans from Brazil and Argentina, which are transported on a longer route around the Cape of Good Hope.
Brazilian iron-ore exports to China then came back online abruptly, and there were not enough Capesizes in the Atlantic Basin to carry the revived cargo flow, causing rates to rebound sharply in May through early September. As Capesize rates rose, shippers began splitting cargoes and putting them on two Panamaxes instead of one Capesize, causing a positive trickle-down effect for Panamax rates.
By mid-September, however, more than enough Capesizes had repositioned into the Atlantic to handle the Brazilian iron-ore business and rates retreated. Consequently, shippers had no incentive to split Capesize cargoes into Panamax loads, so Panamax rates fell.
The ability of South America to replace U.S. soybean exports and support Panamax ton-mile demand will reach its limit in the fourth quarter, due to crop timing. As Evercore ISI analyst Jon Chappell has pointed out in his research, "The calendar is once again approaching the time of year when the U.S. harvest cannot be fully offset by Argentinian or Brazilian exports."
The coal sector also faces fourth-quarter headwinds, courtesy of the expected implementation of an import quota by China. In a client note Nov. 11, Chappell said, "Given the government cap, there is likely to be a significant drop in imports for the final two months of this year, similar to 2018, when December imports fell by 55%."
The just-announced reduction by Vale compounds the pressure from these first two factors. According to Chappell, "It is becoming increasingly difficult to envision iron-ore growth fully offsetting some of the challenges we foresee for coals and grains into year-end for dry bulk, likely providing rate headwinds until 2020."
Still Causes For Optimism
But not all is doom and gloom. One factor that should provide at least temporary support to Capesize rates is vessel withdrawals for scrubber installations. Starting Jan. 1, all ships without exhaust-gas scrubbers will be required to burn more expensive low-sulfur fuel. Bulkers of 100,000 DWT and larger are heavily opting for scrubbers.
Although a large number of Capesizes were originally expected to be out of service by now for scrubber installations, it turns out most of the out-of-service time is still to come. The more bulkers at the yards, the less there are competing for spot cargoes, and the higher the rates.
Asked for the out-of-service estimate as of Nov. 11, Clarksons Platou Securities analyst Frode Mørkedal reported, "In terms of [dry bulk] vessels larger than 100,000 DWT, there are no more than 16 in the yards, with another 158 vessels scheduled to do so over the next six months."
Jefferies analyst Randy Giveans also pointed to a major increase in installations ahead. "The ramp-up is certainly expected, as there have been considerable delays [in installations], which have pushed the retrofit schedules out and have increased off-hire expectations from 30 days to 40 days per vessel," he told FreightWaves, pointing out that "large container ships and tankers were first in line, and delays with those caused a domino effect of delays for bulkers."
Another potential positive: The Chinese coal quota narrative is not as onerous as it may seem, maintained John Wobensmith, CEO of Genco Shipping & Trading (NYSE: GNK). During the conference call with analysts Nov. 7, he said, "We all see coal being cut back. We've been talking about this for six months because of the quotas. But keep in mind that in Southeast Asia, particularly Vietnam, those numbers continue to move up by double digits, and Indian coal imports continue to move up significantly — so it's not just about China."
Finally, according to Kartsonas, there could be seasonal upside that boosts rates, at least a little, in the next two months. "I believe there will be a small rally towards the end of the year," he affirmed.
"The reason is that I think there is seasonality in dry bulk. I think there is a weather element in the winter, both in the Atlantic and in China, where you do have delays," he explained. Port delays remove vessel supply from the market; the less vessel supply, the more the supply-demand balance shifts in favor of vessel interests in rate negotiations with shippers.
"I also believe there is more coal demand in the Atlantic because of weather. You see European utilities stockpiling ahead of winter and you get higher trans-Atlantic demand. Historically, rates from North and South America to Europe are very seasonal and pick up from mid-November until the end of December.
"These factors could potentially push the market higher a bit," he continued, arguing that the BDRY exchange-traded fund should react more quickly to short-term rate moves than listed dry bulk stocks, which are priced on longer-term expectations. "If seasonal factors had been combined with strong iron-ore exports, we would have seen a decent rally, but because Vale has cut its guidance, I still think we'll see a bounce, but I don't think it will be as meaningful as it would have been."