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Intriguing outlook for dry bulk in 2022

Photo: BHP Iron ore pile and conveyor belt in Western AustraliaIron
Negative factors emerging in the booming dry bulk trades make for interesting 2022 outlook, according to the Simpson Spence Young (SSY).

In its SSY 2022 Outlook, the shipbroker summarised 2021 as an eventful year of 13-year highs for freight rates and spiralling prices for commodities set against “several significant trade negatives” which emerged through the second half of the year.

Recovering demand after the outbreak of the pandemic came as COVID-19 supply chain inefficiencies came to bear on vessel supply, with crew travel in particular causing delays. Beneath the record-breaking rates, China in particular was sending negative indicators.

Steel production in China slowed sharply from the middle of 2021, said the report, with a 74m tonne drop on-year in the second half wiping out the 60m tonne increase seen in the first half of 2021. The decision to lower steel output to below 2020 levels was made on environmental grounds, but demand also seemed to fall.

“Steel exports sank to a 13-month low of 4.4m tonnes in November, which compares with a four-year high of 8.0m tonnes in April,” said the report.

The middle of 2021 was an inflection point for more than just steel, suggesting fleet inefficiencies were generating much of the support for freight rates.

“According to customs data, combined imports of ten cargoes ranging from forest products, fertilisers to various ores and concentrates in July-November dropped by close to 9m tonnes from the year-ago total to 133m tonnes. In contrast, 1H21 volumes rose by more than 13m tonnes to 153m tonnes,” said the report.

What’s in store?

China’s real estate sector is under pressure after a tightening of finance rules in 2020, as seen in widespread concern over the health of developer China Evergrande. China’s property market generates significant demand for steel and bulk goods; such is its importance to the Chinese economy that significant policy changes are expected to be made in a bid to relieve pressure on the sector, policy changes which should support maritime transport demand.

“Further complicating the outlook has been the timing of the Beijing Winter Olympics in February 2022 with several events to be held in Hebei province, still the single-largest province for steelmaking. True to form, extended restrictions on steel production and iron ore sintering during the 1q22 have already been announced,” said the report.

The newbuilding orderbook for the dry bulk fleet grew at double 2020’s pace in 2021, but remains at under 7%, relatively low for a strong market.

Regulatory changes like Indonesia’s coal export ban—introduced suddenly on January 1 and eased on January 20—and China’s fluctuating coal imports both contribute to market volatility, and forecasts all depend on COVID-19 developments.

“China’s zero-Covid stance leaves terminals at risk of disruption should a small-scale outbreak be detected. The increased transmissibility of the Omicron variant is likely to lead to an extension of restrictions on crew changes and port calls, so entrenching fleet inefficiency in bulker trading patterns into 2022,” said SSY.

The full SSY Outlook 2022 is available on the company's website.