By Rebecca Galanopoulos Jones, head of research, Alibra Shipping Ltd.
If we were led to believe that the Capesize market couldn’t get any worse this year following 2019’s disastrous Q1 that saw iron ore exports from Brazil come to a halt following the tragic dam disaster, then we were very much mistaken. Q1 2020 saw the Baltic Capesize Index (BCI) enter negative territory for the first time and the period market stagnated with few fixtures reported. Much of this downturn has been blamed on the Covid-19 pandemic but have there been other factors at play?
Whilst the dry bulk market has come to expect a seasonal lull in Q1 with the Lunar New Year holidays in the Far East, this year we have been dealing with an exceptional situation to say the very least as the Coronavirus pandemic continues to have an unprecedented effect globally. The dry bulk market now finds itself in a unique situation where demand has plummeted and at the same time, we are seeing pressure on cargo supply due to mines being shut down alongside all manner of logistical issues including port closures.
Pre pandemic trade relations between the US and China appeared to be thawing, Trump has since embarked on a campaign to fuel media theories surrounding China’s involvement in the pandemic so as to shift blame away from his administration. Sentiment and increased demand from China is also leading the recovery as the Far East begins to emerge from lock down. Stimulus measures are beginning to take effect and China steel demand and production is bounding back. This is not a new phenomenon for China to shut down and open up, although in this instance it has been for a much longer period and more pronounced than you would normally expect.
Macroeconomic factors have undoubtedly put pressure on larger bulk carriers but this sector has also been affected by other external factors that have pushed rates and fixture levels to similar levels seen in the wake of the Vale dam disaster that shut down iron ore production in Brazil last year. In Q1 the average period rate for capes for one-year for the first quarter of 2020 was $14,200/pdpr, up just one percent year on year from the same period in 2019. Capes saw additional pressure early February from the cyclone in Australia that saw iron ore exports from Dampier hit an 11-year low of less than 8mt. Australia has since reported that output for March has seen a recovery as March exports from Dampier then rebounded the following month to 12.8t. Port Hedland, the world’s largest iron ore hub, reported a jump in exports that is 31.8% higher than for the same period last year where exports from this terminal came to a halt due to Cyclone Veronica. Meanwhile activity from Brazil was significantly reduced in Q1 with the latest official statistics from Brazil indicating a decline in March iron ore exports that was 25.9% lower than a year ago and the lowest levels seen since 2012, due to heavy rains and increased safety measures following last years’ dam incident.
This is in part why, in spite of the pandemic, we are now starting to see a recover in rates for the larger sizes and it’s becoming a tale of two markets as Capesize rates are finally showing some positive sentiment as these seasonal issues come to an end in Australia and Brazil we are now starting to see some recovery for capes. However global factors continue to affect the smaller vessels, we have seen the Baltic Supramax Index (BSI) fall to the lowest levels in over a year and on the period front, rates remain low with very few fixtures reported. Improving sentiment in China is key if we are to see an overall sustained recovery in dry bulk in Q2.