Predicting the future is a difficult task under any circumstance, but it has become even harder this year given a range of political disturbances. However, we cannot help but notice a few recent developments that make us think that Q1 next year could potentially be surprisingly strong. Don’t get us wrong; we do not expect any fireworks, but we also believe that the current sentiment is slightly too bearish.
The first quarter is usually a weak period in the dry bulk market as industrial and construction activity slow on the back of seasonal factors. Soybean volumes fluctuate as US exports slowdown in January and February before South American volumes pick up in March. Supply also comes under pressure as some of the deliveries initially scheduled for December are – deliberately or not - delayed into the new year. With soft demand and a rapidly expanding fleet, freight rates usually soften.
However, we believe the usual seasonality was distorted this year. Industry concerns over a potential application of strict winter cuts in Q4 prompted strong steel production ahead of the actual cuts and boosted iron ore trade above its typical mid-year slump, delaying the normal September-October pullback. Weakening demand and steelmakers’ margin-squeeze only made things worse.
In soybean trades, strong volumes out of Brazil in October-November were not enough to offset the sharp drop in the US exports. In terms of coal, Chinese import restrictions, record high stocks at European ports* and rising domestic output in India** put pressure on traded volumes.
All of that could change soon; steel prices in China seem to have stabilized, and margins are creeping back up. Demand is also expected to pick up post-CNY, partly due to seasonal factors and partly due to the Chinese government’s attempts to boost infrastructure investments. Traders and mills are likely to start restocking soon to build inventories ahead of the anticipated pick-up in demand. Talking of stocks, iron ore inventories at Chinese ports are now down to 138.6mt, the lowest in 13 months.
Yesterday China was reported to have bought 1.5 to 2 million tonnes of soybeans from the US with shipments expected to occur sometime during the first quarter next year. Today, the US Department of Agriculture confirmed 1.1 million tonnes of sales. More is likely to come.
At the same time, Brazil is expected to harvest its crop much earlier than usual. According to industry reports, 89% of soybean planting in Brazil is already complete. That’s well ahead of last year’s 84% and the five-year average of 78%. That implies Brazil exports will pick up earlier than usual, possibly in February or even earlier, rather than in March.
Although there is a possibility that the Chinese government will extend coal import restrictions into the new year there is no official announcement of such a move yet. As it stands, quotas will be renewed on 1st January 2019. Imports should start to recover as a result.
On the supply side, deliveries are likely to pick up in January as usual, and Q1 is expected to see a large number of ships joining the fleet. However, 2019 will also see a large number of vessels going off-hire for scrubber installations, especially in the capesize segment. So far we identified 201 capesize/newcastlemax/VLOC vessels with confirmed scrubber retrofitting next year. Although we do not know the actual timing of the installations, we do know that 80 of those vessels have planned special surveys next year. Out of the 80 vessels, 31 have special surveys coming due in Q1. If all these ships go off-hire as predicted it would help to curb the growth in supply in Q1.
Source:XINDE MARINE NEWS
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