By Rebecca Galanopoulos Jones- Head of research, Alibra Shipping Ltd.
As the dry market dropped off following the highs seen in September 2019, the underlying sentiment was that only a resolution in the ongoing trade war between the US and China would signal a change of fortune and provide a boost for the dry market, driving up rates. However, renewed concerns over the health of the global economy spurred on by fears over the rapid spread of the corona virus in China that have shaken the market, compounding fears that this could affect demand.
The last few weeks have shown the traditional dramatic plunge in the Baltic indices and the seasonal lull that we have come to expect in the run up to the Lunar New Year celebrations. So far, we have seen the Baltic dry index fall to a near four-year low of 539, well below levels seen in the same period last year which came in the wake of the Vale dam disaster. The period market has also taken a hit, with rates for a capesize for one year down 14% from the start of the year to an average of $12,500/pdpr*. Whilst we have come to expect a drop in rates at this time of year the magnitude of this downturn has come as a surprise.
Last year we saw rates recover in the second half of 2019 volumes recovered as Vale returned to the market faster than expected and the impending IMO regulations caused a reduction in vessel supply. Many capes left the market for scrubber installation and with yards were running behind schedule, capesize vessel supply faced further disruption. Freight rates for the second half of Q2 2019 were firmer overall and six-month capesize timecharter rates in the pacific rose to $27,500/pdpr.
The news of the signing of phase one of trade resolutions between the US and China, indicating the first steps towards a resolution in the long standing trade war, should have given leverage to stimulate the global economy following a period of uncertainty that has hindered growth in the dry bulk markets. The agreement signed on the 15th January, specified that China will purchase an additional $32 billion of agricultural products until 2021, should have been welcome news to dry bulk markets but in reality, the announcement has been marred by global fears for the spread of the corona virus, creating uncertainty for dry bulk demand in the short term.
At the same time, concerns surrounding the Chinese economy persist and the knock-on effect this will have on a global scale. The latest World Economic Outlook from the IMF, once again showed a downward revision of global economic growth for 2020 and 2021 and to add further unease the latest GDP figures from China show that growth is at the lowest levels in 29 years.
Despite the truce in the trade war, the question remains- whether this dispute has caused long lasting problems for the Chinese economy. The IMF expects that phase one of the trade deal, if durable, should reduce the cumulative negative impact of trade tensions on global GDP by the end of 2020 from 0.8 percent to 0.5 percent.
In the short term, scepticism surrounding global economic concerns are not good news for commodity and dry bulk demand. Equally, the effect of the impact of the corona virus could affect Chinese industrial activity, causing a ripple effect on dry bulk in the short term. But as this uncertainty lingers, this could perhaps create momentum and scope for growth in the second half of the year and on to 2021.
*per day pro rata