The first bad omens for the bulk carrier freight market have started to emerge, amid a correction in freight rates from the highs of the previous months.
It is noted that the industry experienced a very strong first quarter, in a seasonally negative period for freight, and a fairly satisfactory second quarter. Now, however, there is a prolonged “deformation”. The average daily revenue of large capesize bulkers in the spot market has recently fallen to a low of almost four months.
A degree of weakness in capes is expected in the third quarter due to the importance of bauxite exports from Guinea, which are seasonally lower this time due to the rains.
The Red Sea
The catalyst for the up to now increased demand for tonnage was the long distances that ships had to travel, thanks to restrictions in the Panama Canal and the crisis in the Red Sea and by extension the Suez Canal.
According to major research published by BIMCO yesterday (“Dry Bulk Shipping Market Overview & Outlook July 2024“), average vessel distances traveled are expected to increase by 2.5-3.5% in 2024, but could fall by 1.5-2.5% in 2025. The leading shipping agency is basing its estimate for next year on the treaty ending attacks in the Red Sea.
It is noted, of course, that although attacks against commercial ships have subsided to a certain extent, the geopolitical situation in the Middle East seems to be escalating and not the other way around.
Negative signs
Average distances loaded by capesize bulkers grew by 8% year-on-year in the first quarter of 2024. The factors driving this increase were mainly Asia’s larger market share in iron ore and coal from the Atlantic and cargo reroutings from Cape of Good Hope.
There probably won’t be any further increases in distances at least in the short term, but quite the opposite. The seasonal slowdown in the iron ore market in Brazil indicates a slight decline in average distances.
Also, the Panama Canal Authority has announced that it will allow 36 ship crossings per day from September, now returning to fairly close to normal levels. It is noted that at its maximum, the canal can handle 40 crossings per day, a figure that has been significantly reduced in previous months due to drought problems.
The increased use of the Panama Canal will also reduce the impact of the situation in the Red Sea, as the shortest route for US exports, among others, will again be available.
It is noted that a bulk carrier trip from the US Gulf to Qingdao, China, via Panama, takes 32 days, based on an analysis by S&P Global. The Suez or Cape of Good Hope alternative adds 13 and 17 days respectively to the total journey time.
The demand and supply numbers
BIMCO estimates demand will grow between 4.5% and 5.5% this year, before easing by 1-2% in 2025. Freight rates are expected to remain strong through 2024, but demand could moderate amid high inventories among importers.
Demand growth is expected to be less robust year-on-year due to high performance at the end of 2023 and lack of momemtum from trade distances.
China’s weaker-than-expected economic growth in the second quarter points to weak domestic demand. If China misses the target of 5% GDP growth in 2024, the outlook for the market will be worse than our estimates.
On the supply side, the reduced growth of the fleet acts as a stimulus for the freight market. BIMCO expects fleet growth of 2.9% in 2024 and 2.6% in 2025.
Low newbuild deliveries and expected enhanced recycling activity will help slow fleet growth.
