In Dry Bulk Market,International Shipping News 12/02/2016
Divided per quarter of the year, India’s demand was very consistent, with roughly the same amount of petcoke shipped from the US to India in each quarter. Supramax owners have great hopes that India will carry on being a dependable buyer of US petcoke in 2016 and beyond, offering high ton-mile demand, and having surpassed China as the top buyer of US petcoke in 2014. That year it imported 4.3 million mt, an impressive 80% increase from 2.4 million mt in 2015.
It has not been a promising start to 2016 for shipowners on the Atlantic dry bulk market. Demand for grains and petcoke, the bread and butter of Supramax trade West of Suez, has been falling well short of expectations since the end of summer 2015. Coupled with a persistent tonnage overhang, this created an exceptionally negative freight environment in the final months of 2015, which spilled over into 2016.
As if starting the new year on the wrong foot was not bad enough for Supramax owners, 2016 may turn out to be even more challenging for them than 2015. Most crucially, owners face a potential Supramax and Ultramax fleet growth of 10%. Also, there is great uncertainty over future trade patterns, heightened by a recent US Gulf grain export season that left a lot to be desired, and a dramatic turnaround in China’s consumption of petcoke. But not all is rotten in the state of Supramaxes.
Firstly, another Asian powerhouse, India, is set to carry on growing, which translates into a great need for petcoke. Also, China may have bypassed the US Gulf as a chief source for grains this past autumn, but its food manufacturing industry is still hungry for huge amounts of soybeans and sugar. This should provide the Atlantic with at least one very strong loading period in 2016. Last but not least, 2015 bore witness to a steep decline in new Supramax orders. Although this was not counterbalanced by a push for vessel recycling, it reflects a vital change in attitude on fleet growth. If anything, it has laid the foundations for a more balanced Supramax market in the Atlantic well before this decade ends.
BREAKING WITH TRADITION
A bearish desert
Looking at freight levels on the Atlantic dry bulk market in early 2016, Supramax owners could be forgiven for thinking they will never see the light of day again. Compared with a year before, and more so with summer 2015, rates on many key routes have fallen sharply, showcasing a very bearish state of affairs as 2015 gave way to 2016. For example, on January 4, 2016, the grain route from New Orleans to Kashima, Japan, basis 50,000 mt stood at $23/mt.
This was down 25% from an average $30.77/mt assessment in January 2015, and 33% from a 2015 high of $34.25/mt in July.
Similarly, the petcoke route from Houston to Aliaga, Turkey, basis 50,000 mt stood at $11/mt on January 4, 2016, down 22% from an average of $14.02/mt in January 2015 and 37% lower than an average value of $17.49/mt reached in July 2015. Alongside the market’s fundamental oversupply of ships, weak bunker prices also played a part in the creation of the recent negative freight environment. This is because bunker fuel makes up around 70% of a voyage’s cost, and bunker price movements will often trigger freight movements. Cheap bunker prices would be good news for shipowners in bullish periods of trade, as high freight and lower fuel costs would entail more profits for owners. But in bearish periods, the percentage of profit they get from freight is smaller, and the beneficial effect of low bunker prices is smaller, too.
However, the chief driver behind the US Gulf’s lack of sparkle in the fourth quarter of 2015 was its veering away from its seasonal trading role. Traditionally, the fourth quarter of each year is marked by a period of healthy activity on the US Gulf Coast, as its grain export season hits its peak in October-November. This normally leads to bullish Supramax rates in the lead up to the festive season in December, especially as market participants rush to conclude deals before the holidays.
Like bees to honey, Supramaxes are drawn to the US Gulf in the final months of each year because, once employed, front-haul deals in this key loading area offer them the most money for the longest period of time, while also helping them get cover over the festive season. When the market is bullish, offering strong freight rates, trips from the US Gulf to China via the Panama Canal can employ vessels for around 30-40 days port-to-port, while trips to India can last for up to 60 days. Late 2015 was no exception to the US Gulf’s appeal. With a decreasing amount of grain stems coming out of East Coast South America in September, which marks the traditional end of that area’s export season, owners shifted their focus to the North Atlantic. This led to a build-up of Supramaxes in the US Gulf as autumn progressed.
However, the strong grain flows normally seen on the US Gulf did not materialize. This was because the US Gulf fell victim to the success of Brazil and Argentina only a few months earlier.
A bullish oasis
Summer 2015 was a glorious time for shipowners in the Atlantic. Starting in June, and encouraged by bumper crops and cheap Latin American currencies, Asian buyers embarked on a buying spree of soybean and soybean meal, going against even the most optimistic owner’s expectations.
According to Chinese customs data, by September 2015, China had imported 6.9 million mt of soybeans from Argentina, up 50% from 4.6 million mt in the same period in 2014. While a parallel boom in Brazilian soybean exports to China was chiefly served by Panamaxes, Argentina’s exports were primarily carried on Supramaxes. This is because they are the largest vessels that can load in Argentina’s Parana River ports. Argentina can offer owners high ton-mile demand, with the duration of a voyage from the key Parana port of Rosario to Qingdao, China, lasting 40 to 50 days via the Cape of Good Hope. Tonnage in the Atlantic grew very tight, very quickly as summer 2015 progressed, resulting in a period of exceptionally strong rates. For example, Supramax owners could earn as much as $13,000/day plus $300,000 ballast bonus in that time, up from $10,000/day plus $100,000 bb in the spring. Robust gains were also seen in other Atlantic loading areas, as a busy South Atlantic kept draining tonnage from as far as Gibraltar and UK-Continent.
For example, the rate for carrying 50,000 mt of petcoke from Houston to Krishnapatnam, India, rose from $27.50/mt on June 1, 2015, to as high as $33.50/mt two months later. But market Cassandras warned that, the more soybeans Asia bought from Argentina, the less it would need from the US later in the year. Also, once Argentina’s flows began to subside, the Atlantic’s fundamental oversupply of Supramaxes was bound to resurface, they said. They were proven right. Beyond the summer’s bullish oasis lay a bearish wilderness, from which Supramax owners are still struggling to find a way out.
A deluge of deliveries
Meanwhile, at the heart of the predicament Supramax owners found themselves in early 2016 was a tonnage overhang that, already difficult to shake off in 2015, was due to get even longer.
According to Italian broker Bancosta, 2015 saw the delivery of about 216 vessels falling within the 50,000-64,999 dwt segment, leading to a Supramax/Ultramax fleet of around 2,300 ships by late 2015. On top of that, 2016 is expected to witness a 10% growth on year in the 50,000-64,999 dwt fleet, meaning that owners will be competing with about 230 more Supramax and Ultramax vessels in the coming year. Unfortunately for them, Supramax fleet growth is not being counterbalanced by tonnage recycling.
According to Bancosta, only nine vessels falling within the 50,000-64,999 dwt bracket were scrapped in 2015. This is because this tonnage segment is strikingly young. As Bancosta data show, out of 1,891 Supramaxes, 98.7% were, in December 2015, at most, aged 14 years, while 43%, or 811 vessels, were four years old or younger. As far as Ultramaxes (60,000-64,999 dwt) are concerned, out of a fleet of 409 in the end of 2015, 93.6% were four years old or younger, with just nine ships aged 5-9 and 17 vessels older than 14. While the 50,000-64,999 dwt fleet’s youth is an obvious deterrent from scrapping, owners were also put off from surrendering vessels to the blowtorch’s mercy by persistently low scrap metal prices since August 2014, as well as by the positive freight environment in summer 2015.
Of course, the considerably high count of Supramaxes owners are dealing with would not be so problematic if China still called the shots in dry bulk shipping. Ships launched in 2015 and due for delivery this coming year were put on order around 2011-13. At that time, shipowners believed that China would be the gift that carries on giving for many years to come, encouraging newbuilding orders.
To understand how brightly China’s star shone at its zenith, which inflated the dry bulk orderbook, one only needs to look at the huge amounts of petcoke China was consuming until only recently.
THE DRAGON GOES “GREEN”
China’s petcoke u-turn
Petcoke has been a mainstay of Atlantic-to-China traffic for a decade. In particular, China’s appetite for what is an inexpensive but environmentally unfriendly alternative to coal has been a pillar of Supramax trade on the US Gulf. According to US Census Bureau data, China imported a record 7 million mt of petcoke from the US in 2013. This number fell 46% to 3.8 million mt in 2014, chiefly due to high inventories, but volumes were still significant. But then came China’s economic slowdown in 2015 when its economy grew 6.9% on year, compared with 7.3% in 2014.
On the larger, Panamax and Capesize, segments, this slowdown was accompanied by a 23% on year decline in China’s met coal imports to 48 million mt, and while its iron ore imports rose 2.2% on year in 2015, industry sources do not rule out a decline in their volumes in 2016. Also, Chinese crude steel production fell 2.3% in 2015 to 804 million mt, marking its first annual drop since 1981. As far as Supramaxes are concerned, China’s slowdown means fewer petcoke imports from the Atlantic. This is because another symptom of its slowing economy is a decline in its cement industry, a major consumer of petcoke, with production down 4.9% on year in 2015.
The last nail in the coffin of China’s relationship with petcoke was a decision by Beijing to introduce new environmental legislation which will establish a sulfur content threshold, at either 3% or 5%, for the petcoke it consumes. This move comes as no surprise. According to China’s Ministry of Environmental Protection, nearly 90% of major Chinese cities failed to meet air quality standards in 2014, with petcoke one heavy polluter Beijing pointed a finger at. First announced in August 2015, this new threshold has not yet been officially put in place by Beijing, but its implementation is expected in the first quarter of 2016. However, regardless of where it is set, this development is expected to prompt a dramatic reduction of ton-mile demand on the US Gulf for Supramax owners. This region mainly produces mid- and highsulfur content petcoke. The impact of China’s announcement was felt quickly enough.
According to the US Census Bureau, the US exported 3.17 million mt of petcoke to China in the first eleven months of 2015. Out of this, 53% originated in the US Gulf, while 47% came from the US West Coast, which chiefly produces low sulfur petcoke. Typically, the split in origin would have been around 65% and 35% respectively. This was the case in the period covering January-July 2015, right before Beijing’s announcement of its new legislation. During that time, China imported 1.24 million mt of petcoke from the US Gulf, while importing 865,000 mt from the US West Coast. Following the announcement, China imported only 447,337 mt of petcoke from the US Gulf between August-November 2015, while importing 625,787 mt from the US West Coast.
As the graph above shows, this sudden loss of liquidity on the US Gulf had an immediate impact on Supramax freight on the US Gulf, with the rate for carrying a 50,000 mt petcoke stem from Houston to Qingdao, North China, dropping nearly 30% in three months, from $30.75/mt on September 1, 2015, to $22/ mt on December 1, 2015. By mid-January 2016, the rate on this route stood at $18.50/mt, with no fresh petcoke cargoes heard worked on for China on the US Gulf.
India’s bright spot For Supramax owners, there is no going around it. The potential loss of the petcoke route from the US Gulf to China could be a great loss of ton-miles, depriving them of well-paid, long duration employment, which then opens them up in the Far East markets. However, shipowners still have India to rely on, which in 2015 turned out to be a consistent buyer of US Gulf petcoke. The numbers speak volumes: according to US Census Bureau data, India imported 4.4 million mt of petcoke from the US in 2015, with 3.6 million mt shipped from the US Gulf and 737,000 mt from the US West Coast.
Source: Platts (http://www.platts.com/IM.Platts.Content/InsightAnalysis/IndustrySolutionPapers/SR-Global–Bittersweet-16-for-Supramaxes-0216.pdf)
