By Ulf Bergman
The end of July is nearly upon us, and with it comes the end of the summer lull for parts of the seaborne trade. While many in the shipping world can still look forward to their summer holidays in August, demand for dry bulk seaborne transport should start to recover. Although the seasonal recovery affects the dry bulk market as a whole, over the past two years the capesizes have experienced a more pronounced bounce. A repeat this year would prove beneficial for freight rates in the capesizes, as the Baltic Exchange’s index for the segment is already significantly higher than at the same point last year.
Higher Capesize Volumes Year-to-Date
With only a few days of July remaining, capesize volumes for the year’s first seven months have risen by more than four per cent year on year. Much of the year-on-year growth came in the first few months, with global volumes in recent months broadly in line with readings in the past few years. March has, so far, been the outlier of the year, with a year-on-year decline of more than six per cent, as the outbreak of hostilities between the US and Iran disrupted supply chains and weighed on sentiment.
Over the past two months, according to data from Signal Ocean, seaborne exports on capesizes have been remarkably stable compared with the past three years. Still, that stability masks some variability beneath the surface. Exports to China lost recent positive momentum in June amid a year-on-year decline of nearly three per cent, but the weakness proved short-lived, with demand looking to be back at last year’s levels in July. Meanwhile, seaborne exports to South Korea were significantly higher than a year ago, boosted by both iron ore and coal shipments. At the same time, Japanese demand for capesizes faced headwinds.
Year-to-date, export volumes of the main commodities transported on capesizes, namely iron ore, coal and bauxite, have risen to varying degrees compared with the same period last year. Iron ore, which dominates the capesize trade by a substantial margin, grew by 3.4 per cent, while coal and bauxite recorded year-on-year increases of 1.4 per cent and 18.8 per cent, respectively.
However, developments for the key cargoes over the past seven months have been more changeable than the headline numbers suggest. The growth in iron ore volumes was largely confined to the early part of the year, with the past two months recording a modest decline compared with last year.
While coal volumes for capesizes are significantly lower than in recent years and show modest year-to-date growth, the past two months have seen a departure from seasonality. At the same time as monthly volumes have remained broadly stable since May, June and July have recorded year-on-year growth of seven and fifteen per cent, respectively, as the disrupted flow of oil through the Strait of Hormuz continues to fuel coal demand.
After a brief, shallow dip in May, bauxite volumes have continued to exceed those of recent years. However, in absolute terms, monthly volumes have been trending lower since March and are unlikely to recover until after the rainy season in West Africa.
The three main origins of capesize voyages have grown since the beginning of the year. Volumes departing Australia rose by 4.1 per cent, broadly in line with the overall market. For Brazil, the increase was more modest at 2.1 per cent. By contrast, shipments from Guinea expanded by a very robust 25 per cent.
Outlook for Second-Half Looks Promising
Capesize export volumes typically rise in the second half of the year compared with the first, and growth over the past few years has ranged from two to nine per cent. There is little to suggest this year will break the pattern. If anything, several factors point towards the upper end of that range, or beyond it.
Current iron ore prices suggest that Chinese stock-building will continue, supporting demand for seaborne transportation in the coming months. Meanwhile, the recent strength in coal transportation is unlikely to fade soon. As long as the disruption to oil flows through the Strait of Hormuz persists, the substitution effect that translated into solid year-on-year growth for coal in June and July should continue to underpin capesize demand.
Guinea looks set to be a source of both opportunity and near-term constraint. The rainy season across the region will weigh on seaborne bauxite and iron ore export volumes well into the third quarter and extend the recent downward trend into August. However, the continued ramping up of iron ore operations in the country should more than offset the seasonal drag over time. The long-haul nature of these trades, with the bulk of Guinean cargo bound for China, means that every additional tonne carries an outsized contribution to tonne-mile demand.
Taken together, the pieces are in place for a robust second half. With the Baltic Exchange's capesize index already around ten per cent higher than a year ago, continued growth in iron ore volumes, the coal substitution trade tied to the Strait of Hormuz, and a healthy tonne-mile contribution from Guinea's ramp-up all point in the same direction. The stars may be aligning for capesize owners.
Data source: Ocean Analytics