Bulk tonnage market in 3rd quarter 2016

After a fairly steady tone of the bulk tonnage market during the summer at the beginning of this autumn there was a noticeable surge in the freight environment. In comparison with the beginning of July, Baltic freight index of the dry cargo tonnage (BFI) in the middle of the third decade of September rose by 264 points, reaching a record level in 2016 – 941 points. Thus, for the first time in this year BFI was able to overcome the bar of 900 points. If we recall that in February of this year the index was at historic lows in the amount of 290 points, more than three-fold increase in BFI is quite impressive. The average value of the BFI in the third quarter amounted 732 points – compared to 359 points in the 1st quarter of this year and 612 points in the 2nd. However, in the last week of September BFI went to decline, ending the month at mark 875 points.

The main contribution to the growth of the BFI index in this period was made by the bulk carriers «Capesize», for which the corresponding index Baltic Capesize Index (BCI) has increased from 1,030 up to more than 2,000 points. In this, the variation of BCI index values ​​in the 3rd quarter of the year ranged from 757 to 2389 points, showing an extremely high rate of volatility in the level of more than three units.

Particularly noticeable growth of BCI index was observed in the period from 19 to 22 of September, when it was daily getting 180 points in a single trading session of the Baltic freight exchange. As a result, the current level of BCI is almost 300 points higher than the previous year. Together with the index average «Cape-size» earnings was growing reaching 15,200 USD / day., which is more than two times higher than at the beginning of July or September, not to mention the disastrous early August. At that, if in the beginning of July, the average salary for a «Capesize» exceeded the similar indicator for the «Panamax» by 33%, then by the end of September, the gap widened to 2.63 times.

The dynamics of the Baltic Freight Index in the 3rd quarter of 2016

Source:BalticExchange

Average earnings of bulk carriers of various sizes July — September 2016

USD/day.

Source:SeasureShipbroking

A distinctive feature of September 2016 was faster growth of spot time charter rates, compared to the scheduled charter outs. Nevertheless, the voyage rates on most directions had decent growth as well. For example, the rates for the transportation of iron ore by «Capesizes» from Tubarão (Brazil) to Qingdao (China) in the reporting period grew by almost 40% — and reached 12,50 USD / ton.

During July-September Baltic Panamax Index (BPI) rose from 691 to 751 points. That is, if the «Capesizes» grew more than twice, the «Panamax» — only 8.7%. Accordingly, the volatility of the BPI index was much lower than that of the BCI, amounting 38% (from 638 to 879 points). The average value of BPI in the 3rd quarter reached 717 points compared to 383 points in the 1st — and 614 points in the 2nd quarter 2016. Average «Panamax» earnings to the end of September reached the level of 5800 USD / day. And voyage rates for coal shipments from Murmansk to the Continent reached 5,40 USD / ton, which is only 0,70 USD / ton lower than the maximum reached in July, but a half times higher than the minimum, which took place in February of this year.

Growth of the Baltic Supramax Index (BSI) for bulk carriers «Supramax» in the 3rd quarter of 2016 amounted only 44 points, or 7.0%. And just in September, it fell from 721 to 671 points. Average «Supramax» earnings at the end of September amounted  about 7000 USD / day., which is almost 500 USD / day higher than in early July, but the same value  lower compared to the beginning of September. That is, the September freight environment for «Supramax» became a little worse.

A similar tendency, though with its own characteristics, has taken place for «Handysizes». Baltic Handysize Index (BHI) for this category of bulk carriers, compared with the beginning of July, to the end of the third quarter rose by 77 points, or 22.4%, but compared to the beginning of September – declined from 432 to 421 points.

Speaking about the September level of rates during the charter, their strengthening for «Capesize» bulk carriers in the Pacific and the Atlantic market sections should be noted. They have grown from 8,000 to 9,600 USD / day., or 20%. It does not go to any comparison with a twofold increase in the spot rate, which says that the market players do not believe in the long-term rise of the freight environment for this category of bulk carriers. A much greater correlation in this area was showed by time-charter rates for the «Panamaxes» and «Supramaxes» which remained mostly at the same level throughout this period. But the rate for «Handysizes» showed a different orientation on the market sections: if in the Atlantic during September they declined by 250 USD / day, then in the Pacific they rose by exactly the same amount.

The dynamics of the six-month time-charter rates for the various categories of bulk carriers in September 2016

USD/day.

Source:ALIBRA

Influence of the grain shipments

The best example of grain shipments influence is showed by «Handysize» bulk carriers. For these size bulk carriers, in contrast to the «Capesizes» on which ore and coal are mainly transported, grain cargoes are one of the most fundamental, both in terms of traffic volume and in its influence on the level of freight rates. During the 3rd quarter of 2016 the average salary of  the «Handysizes» increased from 5092 to 5995 USD / day or by 17.7%, slightly exceeding even that of «Panamax», with twice bigger capacity. Essentially, this growth is provided by the rates which grew by 2600-3170 USD / day towards Continent — East USA Coast / Brazil. Against this background, rate cut in the opposite direction by 1400-2100 USD / day looks quite unusual. As a rule, the rates in the direction of Brazil / US Gulf — Continent is always much higher than in the opposite direction.

Average «Handysize» earnings in the main direction in the 3rd quarter of 2016

USD/day.

* — на 23.09.16                                                                                             Source:ALLIED

Apparently, the originality of the situation is connected with the growing of the grain shipments from the Gulf of Mexico, USA and reducing (compared to the previous month) shipments of grain from Brazil, i.e. due to lack of grain shipments. The same thing is with soybean the freight rates for shipping of which transported by «Panamax» from Brazil to China has reduced by 0,40 USD / ton. It is to be expected, given that, according to forecasts, the Brazilian corn exports in 2016 will decrease by 17.6% — up to 70 million tons, compared with 85 million tons in 2015. And Government administration Argentine export tax on soybeans caused manufacturers to reduce sales. However, despite the expected decline in exports of Brazilian corn and problems with Argentine grain exports, some support for the freight market may give a growing in 2016/2017 marketing year (MY) export of grain from the United States, whose growth  by «International Grains Council» projects, can be 6%.

Changing of the rates for the transportation of soybeans from Brazil to China in September 2016

Source:SSE

Talking about the influence of grain transport and, above all, the grain of the Black Sea origin, the world’s leading importer of wheat – Egypt has to be mentioned. In August, there has been a clear underestimation of the freight component in «GASC» tenders on purchase of wheat, accounted for only 3.7-4.4% in C&F price. The Black Sea wheat transportation rates in 55000-60000 tons batches to Egypt at the level of 7,00-8,25 USD/t do not correspond to the current freight market conditions. It’s clear that the traders, showing lower, compared to the market, freight rates, simply increase the competitiveness of their offers.

Evaluation of the transport component in the price of the August «GASC» trend winners in Egypt for proposals for the purchase of wheat

Source: maritime periodicals

But in late August – in September, there were at once two events which didn’t please the traders and transporters very much. Firstly, grain sampling period in Egypt port was increased up to 10 days. The new rules could lead to significant delays of the ships, because before that the average time of sampling and related analysis usually was no more than 2-4 days. Secondly, the requirements for quality of the imported grain were dramatically increased in terms of ergot fungus content.

It should be noted that the dispute over the ergot in wheat for export to Egypt has been going on for several months. In the summer, after the adoption of the decision in Egypt «zero ergot», tender grain purchases by this country virtually ceased. Countries-sellers refused to participate in the tenders. The purchases resumed after the decision, allowing the import of wheat containing ergot at no more than 0.05% (as provided for by international standards) was made. In September, the position of the state bodies in Egypt has changed again. The Ministry of Agriculture and Ministry of Health of the country returned to the rule of «zero ergot». Appropriate changes were made in the tender conditions of «GASC». After deciding on a «zero ergot» Egypt retroactively after lengthy inspections stopped sending 60,000 tons of wheat in Novorossiysk and 63,000 tons in Constanta. As a result, the Russian Federation has threatened Egypt to ban (due to violations of sanitary norms) fruit and vegetables imported from that country. And Romanian wheat exporter presented to Egypt the demands to pay a penalty under the contract in the amount of US $ 500 thousand (by the way, Romania, according to official data of the European Commission, is currently the leading exporter of wheat, taking this status from France: from the beginning of 2016/17 and MY as of the first decade of September, Romania has exported 1.215 million tons of wheat, while France – 1,178,000 tons).

After three failed tenders in September due to a boycott by traders Egypt was forced to return to the international standards, permitting the contents of ergot in wheat at the level of 0.05%. First, after the abolition of «draconian» rules of the tender held by the Egyptian «GASC» took place on 22 September. It was attended by four grain trader: «Olam International», «Louis Dreyfus», «Aston» and «Al Wehda». In addition to the low representation (usually such tenders are attended by ten or more companies), the distinguishing feature of this tender was that all participants offered only Russian wheat. As a result, during the tender 240 thousand tons of Russian wheat were purchased. The minimum C & F price, amounted to 186,80 USD / t was suggested by «Aston». According to experts, it is about 10 USD/t higher than the market, which is a kind of payment for the risk of dealing with Egypt. Prices of other participants were even higher.

Thus, inconsistent and constantly changing position of the Egyptian authorities on the issue of «zero ergot» once again excited the market and pushed the traders away. Plus – there have been a serious loss of reputation of the partner and the direct economic losses. According to USD, such a policy (in the case of its continuation) could cost Egypt between 55 and 82.5 million dollars US only this year (including costs in connection with the breaches of the contracts).

After these vicissitudes and victories in the last tender Black Sea wheat has a good chance to win in the ongoing «GASC» tenders, which is greatly contributed by the rapid growth of Russian wheat exports over the past 5 years, it has grown from 11.5 to 30 million tons (forecast).

The volumes of Russian wheat exports for 2012/2013 2016/2017 MY

As for the actual volumes of grain exports from Russia in the current grain season there have been contradictory data (mainly because of the use of statistics – the customs, contract, shipping and so on). According to «SovEcon», export of Russian grain in the first three months of the current MY (July – September) amounts about 9 million tons, which is 8% lower in comparison with the two previous cereal seasons. In «UkrAgroConsult» is estimated that since the beginning of 2016/2017 MY Russian grain export grew up. In July-August, it contained 10%. The major importers were Turkey, Egypt and Bangladesh (recall that, according to experts, the share of Russian wheat was 65% in the Egyptian market; according the results of last season, a quarter of all Russian wheat shipments was connected with this country, and by the USDA – in 2016/2017 MY Egypt will buy about 11.5 million tons of wheat in the world market). Taking into account terrible cluster tonnage market conditions due to lack of sufficient number of shipments of grain from shallow RF ports on the Sea of ​​Azov, we still tend to think that the current state of affairs more truly reflect the pessimistic assessment. But whatever it was, by all accounts, export shipments of grain from Russia in October will be released at the level of 4.5 million tons, which certainly would support the freight market.

In the context of the Russian export of grain we have to mention September decision of the Government of the Russian Federation, according to which until July 1, 2018 a zero rate of export customs duty on wheat is stand. Russian government believes, zero duties will support the export potential of Russian grain and have a positive effect on the intensification of export supplies of wheat. However, according to experts, the effect of this step will be minimal, since the value of the tax after the fall of the ruble exchange rate is too low to seriously affect the export possibilities.

An important role for the grain market is played by steady increase in the Ukrainian grain export for which the port transshipment facilities capacity increased more than five times from 2002 to 2016. According to Ministry of Agrarian Policy of Ukraine forecasted volume of grain exports in 2016/2017 MY will exceed 40 million tons; wheat exports forecast – at the level of 16.5 million tons, including food – 10.1 million tons and non-food – 6.4 million tons; barley exports should reach the level of 5.6 million tons, and the rest in an overwhelming proportion – corn. At the end of September, it has already exported about 10 million tons of grain, which is 500 thousand tons more than in the same period of 2015.

Forecast of freight market development  

According to «ALPHABULK», at the beginning of September 2016, the global dry bulk fleet has a membership of more than 10 thousand vessels with a total deadweight of 777.7 million tons. More than 45% of the tonnage of the fleet account for «Capesizes», 20% – for «Panamaxes», 26% – by «Supamaxes» and 9% – for «Handysizes».

The composition of the world’s dry bulk fleet, as for 09/01/16

Source:ALPHABULK

Taking into account the huge surplus of bulker fleet, the current improvement / stabilization of freight marine environment analysts connect with unexpected improvement in transport demand from China. The macroeconomic policies of the PRC government contributed this increase in demand, which led to an increase in imports of iron ore, coal, bauxite and other goods. In the 3rd quarter of 2016 the weakening of the yuan has supported Chinese exporters, and in August, import volumes increased – for the first time since 2014. Especially noticeable it became in September, when China began to replenish stocks for winter. A burst of activity of the charters-out on the 38th week due to the beginning in the PRC prolonged national holidays. Also, the measures implemented by China in the framework of the program «One Belt, One Road» («New Silk Road») make itself felt.

On the decisive influence of the Chinese dry cargo imports on world freight market conditions testifies to almost 100% correlation between the BFI and computed Shanghai freight Exchange (SSE) index CIDBI. If the BFI for the period grew by 39.0%, the CIDBI index growth over the same period was 39.1%.

The dynamics of the consolidated «China Import Dry Bulk Freight Index» (CIDBI) in the 3rd quarter of 2016

* — on 23.09.16                                                                                             Source:SSE

On the other hand, for only last week of September CIDBI index decreased to 655.44 points, or 9.2%, compared with 7% decrease of BFI. In addition, the trouble fact is that since the middle of August, a decrease of «China Coastal Bulker Freight Index» for cabotage of ore, coal and grain, which fell at the end of September, up to 851.04 points is noticed. Up to this point, since June this year, the index showed a very rapid growth – and even in mid-August exceeded 1000 points. This may indicate a slight weakening of the Chinese domestic market on the above mentioned transportation.

Serious slowdown in the supply of bulk carriers due to the postponement or even cancellation of shipbuilding contracts contributes improving the balance of supply and demand. At the end of 7 months of 2016 the contract delivery schedule was done by only 55%, while in the whole year, it is expected that only 45 million will be delivered from 85 million dwt tons. If we add to this a rather high activity of delivery of bulk carriers for scrap , the growth of the fleet offer reaches the level of 1-2%,which for the first time in many years is behind the growth in demand for transport. In addition, a part of the tonnage can be kept by frequent delays of bulk carriers under loading operations in ports. For example, in the Australian port of Newcastle in August queue of ships arriving for coal rose significantly. So, at the beginning of the third decade of August 29 bulk carriers expected berthing, which is the highest amount since last May.

In the latest report of the «Golden Ocean» company, owned by the shipping magnate George. Fredrickson, significant improvement in the freight market conditions in the dry bulk market, starting from the 4th quarter of this year is expected. However, this improvement in the first place, should affect the «Capesizes», which is expected to increase in the fleet at the zero level, and the «Panamaxes» the tonnage of which will increase by no more than 2%. It will be more difficult for «Supramaxes» which tonnage growth is expected to reach 8%, as well as «Handysizes», according to the delivery plans to the end of 2016, more than 150 units of them should enter into operation.

With such volumes of supplies for «Supramaxes» and «Handysizes» it’s difficult to expect rates’ growth. But for the «Capesizes» some optimistic brokers expect for the «leap» of rates up to 20,000 USD/day in the 4th quarter. «Maritime Strategic International» (MSI) analysts are skeptical about the possibility of such an abrupt increase as there are no fundamental factors for that. At the same time, MSI also predict rates’ growth in the 4th quarter. Thus, the level of rates for «Panamaxes» is evaluated in 7000 at USD/day in October, compared to 5500 USD / day in August – and 6625 USD/day in average for the 4th quarter of 2016.

The concept of average futures quotation up to 2019 is provided by the data of «Freight Investor Services» (FIS), which show that the forward rate for the «Capesizes» and «Panamaxes» will be further strengthened in the 4th quarter of 2016, reaching its peak in October. But in the 1st quarter of 2017 rapid decline in rates is expected – with their gradual increase until the end of the year. Average futures quotation for 2018 is 9100 USD/day for «Capesizes» and 6850 USD/day – for the «Panamaxes», and in 2019 – 10475 USD/day and 7375 USD/day in accordance.

Average level of futures quotation for «Capesizes» and «Panamaxes» in the end of September, 2016

USD/day.

* — on 23.09.16                                                                                                         Source:FIS

Moderate rates’ growth of annual time charter for all sizes of dry bulk carriers in the 2017-2021 is given in the last «Drewry» forecast. Thus, the pessimistic mood in the bulker market in the run-up to the 4th quarter of 2016 is gradually replaced by a moderately optimistic. The near future will show how justified this new optimism emerged. The main thing is that it mustn’t lead to new rash orders of the fleet.

Valery Voynichenko, Ph.D., BINSA expert