Volatility in dry bulk freight set to continue into the new year: 2022 preview

bulk freight ship from birds-eye view going under a bridge


sagarmanis/Getty Images/iStockphoto

The dry bulk freight market has endured a tumultuous 2021 with high global demand for essential raw commodities serving to boost rates across all vessel segments.

That has come amid ongoing disruption arising from the Covid-19 pandemic and a series of severe weather events in Asia and North America.

Following the initial shock of the Covid-19 pandemic, the global economic recovery and the subsequent rebound in the dry bulk market has seen freight rates hit decade-highs this year, underpinned by stringent Covid-19 protocols at various ports – particularly in China – which have created significant supply chain bottlenecks.

In addition, the market has been forced to contend with a string of severe weather events which served to exacerbate port congestion and disrupt terminal operations.

In the US, the destruction brought about by Hurricane Ida’s landfall on New Orleans and the US Gulf at the end of August caused severe disruption to grain loading operations and forced China, the world’s top soybean importer, to shift its demand interest to other locations, such as the US Pacific Northwest and Brazil.

Similarly, freight rates in Asia were also boosted by a series of severe hurricanes during the latter part of the year, the worst being Super Hurricane Chanthu which forced the temporary closure of China’s two largest ports in early September.

Alongside the disruption across shipping routes, sentiment across dry bulk freight markets has also been influenced by fluctuating demand for dry bulk commodities, particularly from within China.

There, stringent measures imposed to curb emissions brought shut-downs at heavy energy using facilities while a severe debt crisis spearheaded by growing concerns in the real estate sector has played havoc within iron ore and coal markets.

A fall in Chinese steel production arising from Beijing’s pledge to limit steel output to below 1 billion mt in 2021 coupled with the ongoing plight of Evergrande and the deepening liquidity crisis in the Chinese property sector has complicated the outlook for iron ore demand in recent months.

Meanwhile, Chinese coal imports have lent support to dry bulk rates in recent months, however, strengthening domestic output is set to limit demand for imported volumes over the coming months.

Agricensus data shows prices peaked through late October, with the key US Gulf to Northeast Asia route surging to $89.05 per tonne before dipping back to $67.25 per tonne by the week of December 3 – a dynamic shared by most other routes assessed.

Outlook for 2022

Despite the sharp pullback in dry bulk freight rates since the beginning of October, most analysts suggest that dry bulk freight rates are set to remain above pre-pandemic levels in 2022 with supply tightness expected to be an enduring feature of the market going forward.

Strong demand for dry bulk commodities such as iron ore, coal and grains is expected to push up charter rates while vessel congestion in China and the Pacific Basin is also expected to remain a key factor underpinning the market in 2022.

Meanwhile, the lingering impact of the Covid-19 pandemic, the potential for new restrictions and a slower than expected economic recovery could weigh on dry bulk freight rates despite expectations of strong demand

In addition, developments in International Maritime Organization (IMO) or EU emissions regulations could affect the cost structures or the earnings capacity of some vessel segments, which could then be passed on to the market.

The sharp drop in dry bulk freight rates since the start of October is merely a corrective pullback from recent highs, market players say, adding that the rates are expected to remain above pre-pandemic levels in 2022.

While global supply chains have experienced significant disruption in 2021, demand for dry bulk commodities have also fluctuated this year owing largely to events in China.

Despite the disruption across major shipping routers, demand for dry bulk commodities such as grains, iron ore and coal has continued to strengthen in line with the steady economic recovery.

This article was originally published to Fastmarkets Agricensus on Wednesday December 29, 2021.

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