Schifffahrt | Shipping
Schifffahrt | Shipping Volatility the top commodity now? While some market observers are quite bullish in the face of recent freight rate improvements, others emphasize that market fundamentals have not really changed. They fear another global recession impacting the dry bulk sector Rating agency Fitch expects dry-bulk trading volumes to grow by 3% in 2020, up by more than 1.5% from 2019, driven by higher iron ore volumes together with other commodities, such as coal, grains and steel. Iron ore volumes, which constitute over a quarter of global dry-bulk trade, suffered in 2019 due to lower exports from Brazil and Australia following an accident at Vale’s site in January and weather effects at Australian ports. »However, shipments are picking up with capacity gradually coming back online. Higher iron ore supply should be matched by better demand due to higher global steel output,« Fitch said in it’s recent shipping sector outlook. India’s iron ore imports could also rise in 2020 due to potential delay in renewal of several domestic mining leases that are due to expire. Volumes for coal, which constitute almost 25% of global trade, should be supported by higher coal-fired power generation in emerging Asia. Although positive signs are showing, BRS Brokers’ Head of Energy Research, Andrew Wilson, was less optimistic, speaking recently at the HANSA-Forum »Shipping | Financing« in Hamburg. He pointed to the amount of coal and iron ore going into the EU by sea that has plunged in 2019. »A lot of this is coming from the slowing economic growth,« he said. The swift recovery in Asia after the Vale disaster in Brazil, however, »underpins not a recovery but a better picture now in the dry bulk market.« Delaying the inevitable BRS Brokers’ Andrew Wilson based his concerns on the global GDP outlook A lot of vessels are being taken out of the fleet at the moment because of IMO 2020, to be fitted with scrubbers. This is helping to support markets, said the analyst, »but it is almost still delaying the inevitable, there is still this weakness in the global economy. Unfortunately there is no other China. There may well be an India and there is Vietnam, Philippines etc. that can bring more demand to the table. But we are not going to see one country being able to bring global growth back up. I just don’t see a very strong demand picture.« »I don’t think I have ever seen a time where we are seeing such volatility and such uncertainty in markets,« Wilson said. »I don’t believe that we are out of he woods, yet. I believe that, looking at where we were ten years ago and looking © Stelling at the great recession, a lot of the problems in the global economy still remain. The IMF has never projected a global recession. If they are not projecting one now, I’ll be very surprised.« Wilson is »far more bearish« than the IMF for next year, looking at the underlying weakness in the global economy. Looking at the US-China trade war, a slow down in a number of key consumers and central banks that are slowly running out of options, for next year Wilson rates the chance for a global recession at around about 30%. »If there is not going to be a recession, I think there is going to be a significant slowdown,« he said. However, he expects the trade war to be resolved by the time there is a presidential election in the US next year: »Our base case is that somewhere around second and third quarter there will be some sort of resolution. We don’t believe it is going to be quick but we don’t believe is going to drag on for several years either.« Pick-up in capacity growth The United States are going to remain an »enormous exporter« of agricultural products, Wilson thinks. »The US and China will get back together because they need each other. We are going to see more flows of all sorts of commodities into China, not just coming from the US but from Latin America for example. Then there are other places that show economic growth, such as India, Philippines, Malaysia, so there is going to be much more demand from there. Russia is relatively untapped in certain areas,« Wilson told the HANSA-Forum audience but added: »Don’t expect 2007 to come back again. I don’t think we will have a really sustained growth.« Fitch Ratings forecasts a net fleet growth of 3% in 2020, slightly higher than 2.7% in 2019. »The pick-up in capacity growth should be driven by delivery of new-build ships. Supply should also be boosted by the return to service of fleet after increased dry-docking ac- 24 HANSA International Maritime Journal 01 | 2020
Schifffahrt | Shipping tivity in 2019. These factors should be partly offset by lower optimal operating speeds for ships due to higher costs associated with low-sulphur fuel usage following the implementation of IMO 2020,« the agency’s report says. Vessels with a combined capacity of more than 45 mill.DWT are scheduled to be delivered in 2020, up from about 30 mill.DWT in 2019, according to data from Clarksons Research. The uptrend in rate of vessels being out-of-service for scrubber fittings in 2019 should also reverse next year. But BIMCO’s Chief Shipping Analyst, Peter Sand, warned in a recent dry bulk market report: »The fundamental balance in the market has worsened in 2019 with supply growth outpacing that of demand. He expects this to continue into 2020. »This will do nothing to help shipowners pass on the additional costs of the looming IMO 2020 sulphur cap, which is set to add even more pressure to already struggling bottom lines«, he said. »BDI could jump by 15%-20%« Meanwhile, Fitch stands by its quite bearish outlook: »We expect freight rates to rise in 2020, driven by improved supply/demand balance and an increase in fuel cost. We think the Baltic Dry Index, based on time-charter rate average for various vessel sizes, could jump by 15%- 20% in 2020, after remaining fairly flat in 2019 when supply growth has outpaced demand.« While there has been a significant recovery in the Baltic Dry Index in the second half of 2019, the agency expects rates in 2020 to be less volatile for the year as a whole. The increase in annual average and relative stability in 2020 should be similar to the trend seen in 2018, when both trade volume and fleet capacity grew by 3%. An 18% increase in the annual BDI average in 2018 had followed a 70% jump in 2017 and a recovery from historic lows in 1Q16. Bull or bear? That seems to remain the question for the year ahead. fs © Selzer HANSA International Maritime Journal 01 | 2020 25
