Arrow Dry Bulk Market Outlook Feb-23

2023 could see the most anticipated recession in history: Soaring inflation, aggressive rate hikes and the rising cost of living continue to cause demand destruction and could tip the world economy into a recession in 2023. There is a strong conviction about the possibility of a global downturn in the market, but there is also a lack of consensus on the severity of it. While some leading indicators point to a sharp downturn, others suggest the opposite. We expect demand to remain weak in the short term, particularly in the western economies. However, conditions are set to improve in China from Q2 onwards, with the recovery gathering pace towards the end of the year as western demand picks up. This should be reflected in global dry bulk seaborne trade.

Economic conditions are improving: Recent high-frequency economic data signal improving macro conditions in major economies. Inflationary pressures are receding, global supply chain tightness is easing, and the manufacturing sector is showing early signs of stabilizing. Like the economy, inflation is almost always cyclical, and in most major economies, disinflation will likely be more dramatic than the consensus and central banks’ predictions. While some macro headwinds will persist, falling price pressures should pave the way for rate cuts in 2H23 and in 2024.

Growth is again the top priority for Chinese policymakers in 2023: Policymakers in China made three major U-turns since November last year; lifting of the zero-Covid policy, easing of the “3 red-line” policy in the real estate sector and the easing of the Australian coal import ban. The dramatic change in direction in such politically significant matters suggests that growth is once again the top priority for the Chinese government this year. We expect the policy to be pro-growth and pro-business in 2023, which should boost China’s raw material imports over the next 18-24 months.

Dry bulk headwinds turning into tailwinds in 2H:  We expect the dry bulk market to face demand headwinds early in the year, partially due to seasonal factors and in part to soft demand in China and weaker conditions in the West. While we expect Chinese demand to rebound soon, most of the activity will likely be in the services sector initially, with the recovery in the industrial sector picking up as we move further into Q2/Q3. Ex-China demand is expected to remain subdued in 1H, bottoming out sometime in 2H and showing a broad-based improvement towards the end of the year and in 2024. In line with that, we believe the dry bulk market recovery will be driven by the larger ships (Capesize+Panamax). Geared segments will struggle a little longer due to weak demand from ex-China, but they, too, should stabilize in 2H and gain momentum in 2024.

The Capesize market has reached an inflection point: While we expect high volatility in the near term, primarily due to seasonal factors, we believe the Capesize market has reached a cyclical inflection point. Weather-related disruptions (Australia cyclone and Brazil rainy seasons etc) and disruptions caused by the recent surge in infections in China following the rapid reopening are the key downside risks in the near term. However, as the seasonal factors fade and China’s economic stimulus gathers momentum, dry bulk volumes into China should start to rise in Q2. The segment also benefits from the growth in tonne-mile-intensive bauxite trades out of West Africa, which we believe will continue.

Stronger grains and stable coal volumes should support the Panamax segment: A sharp drop in grain and iron ore tonne-miles was the main drag on Panamax demand last year. By contrast, the Panamax segment was the primary beneficiary of the surge in coal volumes and the shifting trade flows. In 2023, we expect grain trade flows to normalize and volumes to increase, boosting Panamax tonne-miles. Recovering iron ore volumes should also support demand. Growth in coal shipments, on the other hand, is likely to cool. Overall, we expect the Panamax segment to remain stable in the near term, improving steadily with the start of the Brazilian soybean exports in March. On another note, Panamax congestion remains near record high and continues to restrict tonnage supply. However, it also poses a significant downside risk in the event of unwinding, as it could lead to a sharp rise in the active fleet.

Geared segments are exposed to slowing minor bulk demand and a potential unwinding of congestion: Aggressive rate hikes and the rising cost of living continue to cause demand destruction globally. Falling exports of major Asian exporters, shrinking new orders and easing supply chain tightness suggest that demand for durable goods is falling and that manufacturing output will decline further in the coming months. Minor bulk demand will likely be affected as a result in the short-term. As such, we anticipate the geared segments to struggle a little longer and suspect that the recovery may lag the one in the Capesize and the Panamax segments. Congestion is also excessively high in the Supramax and Handysize sectors. While it continues to restrict tonnage supply and support earnings, a potential unwinding could release significant tonnage into the market at a time when minor bulk demand remains weak. Long-term prospects, however, are unchanged. Minor bulk trade growth is expected to outperform over the next decade and mainly benefit geared tonnage.

Fleet growth is set to slow further and will help to restore supply-demand balance:Dry bulk fleet growth slowed down throughout 2022. The supply side still looks constructive, and we expect growth to slow down further this year. Slowing capacity expansion will aid the dry bulk recovery in 2023 and tighten the supply-demand balance from 2024 onwards.

The newbuilding market is accelerating, with growing demand for bulkers and crude/product tankers: Bulker newbuilding prices have declined more than 10% over the past two quarters, and buyers are showing renewed interest in these revised price levels. With the limited availability of dry bulk second-hand tonnage and the prospect of environmental regulations magnifying the spread between the eco and non-eco fleets, we expect dry newbuilding demand to intensify. Shipbuilding production costs continue to appreciate, there are limited available berths within the next 2.5 to 3 years, and the tanker newbuilding market is accelerating, competing for the same limited slots. Thus, we expect dry bulk newbuilding prices to start climbing alongside tanker prices as demand is restored.  In the longer-term, heavily consolidated shipbuilding capacity and the need for bulker and tanker fleet replacement will hold newbuilding prices at elevated levels this decade, compared with the 2010s.

Source: Arrow

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