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As cape market cools, this might be the year of the smaller bulker

Home | Press | Tradewinds | As cape market cools, this might be the year of the smaller bulker
Panamaxes are leading the charge, and it is a trend that could have legs

Sentiment for dry bulk is looking good this year with demand moving up, yet there are still many challenges to overcome on the road to recovery from the pandemic. However, the strength of the capesize market last month has galvanised sentiment for dry bulk going forward this year. Dry bulk freight markets got off to an unexpectedly strong start with the average for the BDI in January at the highest levels seen in over a decade. The Baltic Capesize Index (BCI) witnessed the strongest January since 2010 and period rates for one-year reached the highest levels since last summer.

Historically, Q1 tends to be the weakest quarter for bulk carriers as the market winds down in the run up to the new year festivities. Incentives in China to encourage workers to stay put during the holiday season and prevent the spread of COVID-19 meant that some factories remained open and this cushioned the usual market dip. However, towards the end of January, capesize rates finally changed direction as the usual seasonal lull finally took hold and the market began to fall as the market finally reacted to the cooling measures put in place in China back in December to calm onshore iron ore price rises.

On the whole, capes tend to lead the market in either direction with volatility eventually filtering through to the smaller sizes, so it has come as a surprise to some to see the panamax, supramax and handysize markets not only moving in the opposite direction but achieving the highest levels seen in 11 years with the BPI hitting 2518 mid-February, and what’s more the market fundamentals for this year are looking up for the panamax sector and below.

At the time of writing, the panamaxes were outperforming capes on the spot market and on the period front the panamax sector has experienced higher year-on-year increases with one-year rates up 39% from last year to an average of $14,347/pdpr. As panamaxes become more expensive, there is also more incentive to split their cargoes on to smaller ships which is adding to the positive momentum for supras and handys. This market spike is down to a perfect storm of factors at play that have given a boost to the medium and smaller sized bulk carriers, particularly in the pacific that is holding very strong at the moment.

The unofficial ban on Australian coal to China has taken a number of bulk carriers out of the market with around 50 bulk carriers vessels waiting to discharge their cargo off the coast of China. In turn this has led to Indonesia seeing an increase in coal exports to China. It is thought that China has agreed to buy $1.47billion of coal from Indonesia over the next three years, which is welcome news to the panamax sector. In the short-term, the current cold snap in the northern hemisphere has increased coal demand and provided an additional bonus for panamaxes.

As countries emerge from the pandemic and vaccine roll outs take effect, we are also seeing global commodity restocking. With commodity prices healthy, there is much positivity in this area, and this is where the smaller bulk carriers have an advantage over the capes thanks to their versatility in carrying a wider range of cargoes. China is of course the forerunner in this market rally with strong demand, providing a boost for the corn and soybean trade. The latest five-year plan from Beijing is expected to have a stronger emphasis on food security management than ever before by focusing on market stabilisation and grain management. Increased grain commodities are expected to come from the US where traditional trade levels are expected to resume, leaving behind the impact of the US – China tradewars and the swine fever outbreak of 2019 that reduced Chinese feedstock demand. In addition, soybean production from Brazil is expected to reach record highs which may in turn lead to a strong export season from east coast South America.

After a very strong start to the year in what is traditionally a subdued season for this sector, it will be interesting to see how this market plays out in the coming weeks now that the Far East has returned to work following the holiday period. Will the capesize sector finally catch up with the medium to small sized bulk carriers? With no end in sight in the short term for bulk carrier commodity demand, the future for bulk carriers looks promising.

By Rebecca Galanopoulos Jones, Head of Research, Alibra Shipping

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