URSABLOG: Tectonic Shifts?

An earthquake of 5.1 on the Richter Scale struck just north west of Athens this afternoon: we are on the sixth floor here in Piraeus and it created quite a wobble. This was my first ‘big’ one since I have lived here for ten years or so, and the experience was novel and alarming at the same time. Everyone looks at each other, but everyone tries to stay cool at the same time. I suspect that if one makes a run for the stairs then we all do. No-one ran for the stairs, but two aftershocks made for an interesting, if edgy, afternoon.

Another seismic event has happened here this week, but more slowly: I am changing my mind about the dry bulk market. Maybe we are in for a longer run than I previously thought. I make no apologies, changing your mind when you are faced with new facts is sensible, especially when the same question is asked twice. The question was basically: is this spike in the freight market demand or supply driven?

Firstly however we have to consider what do we mean when we say ‘demand and supply”? Let us first look at the demand and supply of the commodity that is causing all the fun: iron ore. The numbers for demand are hard to determine because the main importer is China, and they will not advertise their demand for iron ore before they book cargoes, mainly because they don’t want to show their hands, and drive the price up further from already record levels. The supply side is easier: we know of recent restrictions to supply in Brazil and Australia and that they are only now coming back onstream in the same volumes as they were previously. Expect over 7 million tonnes out of Vale’s southern system this week, but remember that first half July shipments are down 15% year-on-year.

Then I looked at the demand and supply of ships themselves. One of the hypotheses that had been put to me was that the supply of large ore carriers was restricted because a lot of them were in drydock having scrubbers fitted. I spent a happy few hours yesterday with Marine Traffic and Equasis, finding out where ships are and what they are doing, and why. If indeed there were large amounts of ships out of service then that would support my previous thesis that this recovery is just temporary.

It was an interesting exercise, for a number of reasons. I looked at all existing ships larger than 250,000 dwt I could find in existence, i.e. trading and on the water, built since 1980. I then found out where they were, whether they were laden or in ballast, or in ship repair yards. I noted the speeds of the vessels, and if they were in drydock I checked whether they were carrying out repairs as per their scheduled intermediate and special surveys, or if they were in drydock out of their scheduled survey cycles. I did this on a ship by ship basis, rather than just getting average numbers, and in doing so I have found some rather interesting stories to tell, some of them completely unexpected, at least for me.

Of a total fleet of 218 vessels, a grand total of six – 6 – vessels of a combined deadweight of 2.125 million tonnes were at a ship repair yard and out of the game. Of those six, four were doing unscheduled works, most likely fitting scrubbers. So much for the idea that a load of ships were out of the water and causing a supply problem. Even if an estimate of 14 ships (as one client told me) in total were still scheduled to get scrubbers, this would mean that the best is yet to come, and the fourth quarter will be the best for ten years or longer. Hold on to your hats!

There were a few other intriguing facts that came out. There are 42 ships over 20 years old still trading, and the majority of these appear to be converted VLCCs. In fact Polaris Shipping still own some of these ships, despite the sinking of their “Stellar Daisy”, lost with all hands except two crew members picked up some time after. I hope the current excellent market conditions will bring their planned disposal forward, and soon.

Another interesting point for me was that over 20% of the ships in this size, although admittedly all below 300,000 dwt, are trading in the Pacific, typically on Western Australia – China/Japan/Korea round voyages. Others go into Oman to discharge, and some, very few, go into Saldanha Bay to load.

[Interesting personal fact: I have been to Saldanha Bay, and stayed in a mock Greek resort called ‘Mykonos’ there. Mykonos it ain’t: don’t go. I know; I have stayed there. I got my worst ever sunburn – and that’s saying something – and the whole area was full of poisonous snakes. The ships and the steelworks were interesting though.]

Another surprising thing for me was how it seems that there are multiple discharge ports in China. I had assumed that iron ore was loaded in Brazil and dumped in Qingdao or somewhere and then back to Brazil for loading again. It appears I am mistaken. Ships seem to discharge at more than one port in China and seem to be hanging around for quite a while in between waiting to discharge. Congestion at discharge ports points either to rising stockpiles or insatiable demand. As an owner’s representative, I will go for the latter.

The speed of the vessels themselves seems to be as expected, 10-11 knots laden, 12-13 knots in ballast, except in some cases ships are racing back to the Atlantic at speeds of 14.5 or even in excess of 15 knots. It is dangerous to make assumptions about why this is the case, but I suppose if you knew the contracts behind the voyage you would have the answer. When the average ballast leg averages excess 13 knots, we know we are in for a boom market.

But we can’t always trust the data. There are some figures that must be just simply wrong: a laden vessel proceeding to Brazil at 14 knots cannot be correct. There is a small sample of these anomalies which can be argued is either a case of the exception proving the rule, or calling into question the accuracy of all the data; I prefer to be sceptical.

But by challenging my assumptions I have had to change my mind. Or as Arthur Conan Doyle has Sherlock Holmes say:

“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”

Once you take out problems of supply of the iron ore itself, or the supply of tonnage, the fundamental reason behind the cape boom seems to be an increase in demand for iron ore from China.

Now before we start extrapolating an earthquake into a tectonic shift in the market, let me raise a few caveats. This is a brief research exercise by a broker, not an analyst, using mostly free to use data. It also represents a restricted data sample arbitrarily chosen by me. If I had the time, and the patience, I could do it for all sizes, but I would go data blind, and crazy.

But it does raise the intriguing prospect: if this is the start, not of a new super cycle (a phrase I have heard used, rather hopefully by a few people, particularly capesize owners, this week), but at least of a prolonged recovery in a period where the orderbook is small and global trade is steady, then this is a very pleasant surprise.

The real lesson for me is that how often we forget that in dry bulk shipping we are still hugely dependent on China for the dollars that flow in to our industry. The stimulus, that unwieldy tool used to maintain growth, has been brandished again to offset the impact of trade wars and further develop the internal Chinese economy. If China’s economy is now in balance with the rest of the world, then this is even better news, if predictable:

“Policy has been very clear that China will speed up opening the domestic market and increase imports,”

said Zhang Jun, head of the school of economics at Fudan University in Shanghai, adding that this trend was likely to continue.

The longer the freight market shows signs of improved health, the longer that iron ore demand remains high, the longer spot capes have fun, and everything else gets tighter, the brighter the long term looks. We don’t want it too bright, because then we will go off and order a bunch of new ships, and inflict another dose of self-harm on ourselves. But don’t worry, we will, it’s as inevitable as night following day, so we may as well get used to it. And I find it quite refreshing that our inability to predict the timing of the recovery is more or less the same as our inability to predict the timing of earthquakes. At least it keeps us all on our toes. 

Simon Ward

www.ursashipbrokers.com