Intermodal Weekly Market Report

Please find below the Intermodal market report for week 40 2021.

Intermodal Report Week 40 2021

Market insight  By Tamara Apostolou, Research Director

Following up on our insight on May 2021, where we discussed about the Capesize market outlook for the second half of the year, we are pleased to see that dry bulk Q4 high seasonality has returned after at least 3 years of underperformance, driving also the Q4’21 and Q1’22 FFA curve to multi year highs. Back in May, we had explained why we thought a higher Cape market peak during 2H2021 was in the cards, with fundamentals recently being boosted by accelerating restocking demand, near record high Capesize congestion at Pacific discharge ports and a global energy supply deficit leading to scrambling for coal supplies globally. In the present insight, we are briefly addressing some of the market points that are likely to impact the direction of freight rates looking forward.

Iron Ore restocking to be in full swing during Q4 regardless of China’s crude steel production contraction. Q1 2022 Risks: Slow-down in construction during winter and in view of China’s Winter Olympics, exacerbated by high energy costs. China’s property developers slowing down land purchases amid deleveraging efforts  

The primary force behind the crude steel production decline in the short term is the severe coking coal /coke and power shortage forcing crude steel production to adjust downwards.  Cuts are expected to intensify from November 15^th to the end of the year as a 1st stage and then through March 2022, as per government’s pledges. Even if most of the targeted steel production cuts materializes through Sep-Dec 2021, probabilities that they will immediately translate into a decline in iron ore requirements are low, as 1) the iron ore restocking process is directly connected to iron ore seaborne supplies which are the strongest during Q4 – the decline in iron ore prices from multi year highs in May 2021 is currently facilitating the restocking process  supporting the purchasing power of steel mills – steel mills margins remain strong due to the diverging trends in steel and iron ore prices, despite the surge in coking coal costs 2) Skyrocketing energy costs are likely to negatively impact more the scrap related steel production process during the quarter (Electric Arc Furnaces are higher energy consumers) vs Blast Furnaces (more iron ore requirements).  When iron ore restocking will be completed, this will be a negative signal for new iron ore procurement, likely during the 1H2022. On this note, iron ore inventories at China’s ports have increased by +9.2 million tons since the end of Q2 and there is more room for them to inflate further by the end of the year.

Inflationary pressures on the energy complex supportive to dry bulk freight rates in the short-term. Q1 2022 Risks: La Nina conditions might bring a colder winter supporting coal consumption but also wetter conditions in Australia from December to April increasing risks of exports disruptions  

Natural gas prices have raised the price ceiling higher for the whole energy complex and while international coal prices have hit record high levels, the price gap with natural gas continues to incentivize substitution in power generation globally and Europe particularly. The competition for securing coal supplies in both basins has inflated $ per ton freight across major coal routes to 12-year highs – which we think is sustainable – as the % of freight in coal prices is still low (approx. 13%) compared to 2009-2010 (approx. 22%).

China’s domestic coal output is expected to increase in the next months on a series of government measures to boost supplies, although the incremental volumes during Q4 are not expected to be sufficient to cover the supply deficit. The continuous decline in coal inventories at major power plants and expectations for a cold winter continue to indicate increasing thermal coal import needs for restocking in the winter heating season. Demand for coal imports is further enhanced by India’s urgency to restock as inventories at power plants have dropped to the lowest level since 2017 at 7.3 million tons but at a record low in terms of days of consumption i.e. just 4 days, as per latest data from India’s Central Electricity Authority.

High bunker prices are supportive to dry bulk freight rates as we had discussed in our May insight, likely to exacerbate fleet inefficiencies across the basins, with the Atlantic expected to benefit more in the short term. Talks about demand destruction from high oil prices will be substantiated when manufacturers’ profitability and consumers’ purchasing power starts to be negatively impacted with costs curves rising upwards. This is likely to take place at higher prices than the current $80/bbl in our view and those would have to be sustained during the quarter.

Chartering (Wet: Firmer / Dry: Firmer)

The Capesize market has gone from strength to strength last week, with BCI surpassing the 10,000 points barrier. The Panamax sector noted small discounts on earnings while the geared sizes ended up the week on a steady/positive tone. The BDI today (12/10/2021) closed at 5,378 down by 31 points compared to previous Tuesday’s (05/10/2021) levels. Despite the fact that VLCC rates were steady last week, sentiment across the crude carriers market was positive, with strong gains materializing across both the Suezmax and the Aframax sectors. The BDTI today (12/10/2021) closed at 701 points, an increase of 52 points, and the BCTI at 477, a decrease of 14 points compared to previous Tuesday’s (05/10/2021) levels.

Sale & Purchase (Wet: Softer / Dry: Firmer)

In the Secondhand market, the appetite for dry bulk units remained strong during the past days. In the tanker realm, MR units almost monopolized buyers’ interest while no crude tanker unit sales emerged last week. In the tanker sector, we had the sale of the “JUSTICE VICTORIA” (74,902dwt-blt ‘10, Japan), which was sold to Greek owner, Velos Tankers, for a price in the region of  $17.3m. On the dry bulker side sector, we had the sale of the “BAOGANG GLORY” (207,826dwt-blt ‘08, Japan), which was sold to Chinese buyers, for price in the region of $31.5m.

Newbuilding (Wet: Stable+ / Dry: Softer)

Boxships attracted most of the interest last week with a plethora of deals coming to light. At the same time, a decent number of dry bulk units were ordered while given the complete absence of tanker newbuilding contracts during the past two months, the presence of four firm plus two optional LNG fuelled Aframax units from Greek owner Tsakos at Daehan shipyard caught our attention. On the dry bulk front, Belgian owner CMB concluded another pair of Newcastlemax units (six in total) at Qingdao Behai. In addition, DSIC yard secured one more newbuilding order from Golden Ocean; the owner expanded his fleet with four dual fuel 85,000dwt Kamsarmax vessels at an undisclosed price. As far as the Containership realm is concerned, a total of around 108,000teu has been added to this current year’s contracting activity. Among the recent newbuilding orders, Zodiac Maritime declared an option for four 15,000teu boxships at DSME. Each vessel will run on both LNG and conventional fuels and are estimated at a value of $130 million each. This is the second order placed by the UK based owner; in February 2021, four neo-panamax containers were ordered at a price of $110.05 million each, however without the capability to use LNG as fuel.

Demolition (Wet: Stable+ / Dry: Stable+)

The number of owners willing to dispose their vintage units remained low for another week. At the same time, the steel market saw positive demand amidst a continuing revival of the manufacturing sector. However, the demolition market was not affected to the desired extent with weak activity materializing during the past days while the offered scrap levels remained almost unchanged w-o-w. India has returned to the competition with its interest in fresh tonnage improving last week which was followed by an increase in breakers’ bids. A smaller increase in offered scrap levels was also observed by the Pakistani buyers who emerged as the leading demo destination at the time of writing, while average scrap prices out of Bangladesh remained unchanged. Average scrap prices in the different markets this week for tankers ranged between 290-595/ldt and those for dry bulk units between $280-585/ldt.