Coal, iron ore to dominate bulk shipping over 5 years; India seen driving freight market

• Green steel shift not to impact iron ore demand
  
  
• Australian coking coal demand seen contracting
  
  
• Freights to dip by 2026 amid newer ship deliveries
  
  

Morning Brief: The drivers in the bulk dry cargo space will primarily be coal, iron ore and 40 other commodities over the next five years. India will command the freight market by 2030. The Dry bulk shipping demand growth rate is seen going down over five years but is not expected to enter negative territory. Shipping demand, of course, includes demand for commodities plus the distance travelled by a ship. Longer distances will obviously command higher freights.

Is increasing use of EAFs making iron ore irrelevant?

Even though China's steel production using EAF has increased from around 25 million tonnes (mnt) to almost 100 mnt between years 2000 and 2023, the share has declined as its total steel production has increased faster, observed Rahul Sharan, Deputy Director, Bulk Research, Drewry Shipping Consultants India while speaking at a recent BigMint conference. He added: "We do not have enough scrap to support this kind of production," putting forward a strong case for iron ore.

Secondly, the global shift towards green steel and EAFs will not impact iron ore demand in the near future since, as per Worldsteel, the average life of a steel product is at least 40 years, in cases, going up to 80-90 years. Most of the construction seen in India and China, the two major economies driving shipping companies, has taken place over the last 20-35 years. So, scrap from the same will not be immediately available to support steel-making through this route. As per Worldsteel, around 115 mnt of additional ferrous scrap will become available in 2029; while Sharan said, as per Drewry's forecast more than 340 mnt of "more" steel will be produced globally in 2029, creating scope for 200-500 mnt of additional iron ore over 2024-29.

Iron ore demand growth is likely to be 2% annually over 5 years. Inventory at Chinese ports are high at the moment and ore prices are low and may go further down, and in that sense, demand could be higher, Sharan added. Over the next five years, except for a short-term slump in global, Chinese or even US economies, average growth should be positive and demand for steel will be high, he feels.

Demand for Australian coking coal to decline?

China was the highest importer of coking coal from Australia but that demand has shifted in the last 3-4 years to other sourcing countries like Mongolia and Russia because of political disputes. From a 23% share in 2020 it has shrunk to a mere 3% in 2024. But is that 35-50 mnt of Australian coal going somewhere else or contracting? China's burgeoning trade with Mongolia via the additional logistics infra, will curtail seaborne trade. Plus, higher imports from Russia over Australia will dampen shipping demand.

For every tonne of coal switched from Australia to Russia, the tonne-mile demand might reduce by 62%, Sharan informed. A shift in trade from Gladstone (Australia)-Caofedian (China) to Vanino (Russia)-Caofedian (China), will decrease shipping distance from 4,416 nautical miles to 1,645 nautical miles. The Capesize market will be the most impacted as most coal exports from Australia are shipped on these vessels.

The coking coal shipping market may see a 3% contraction annually, because, although some more volumes have gone into India, Japan and Korea, these have not made a huge difference to shipping demand.

But if 10 mnt of thermal coal is being shipped from Indonesia to India and the same volume between Colombia and India then there is a huge difference in shipping demand because of the longer voyage for the latter. This would translate into more supply and mean more charter rates and more freight costs. A large chunk of the growth in coking coal is seen driven by India because the blast furnace route of steel-making will be high here for the next five years.

Thermal coal has seen positive growth in other major economies, except possibly the EU, which is supporting demand for dry bulk ships.

That apart, bauxite, soyabean, grains, copper ore, sand aggregates etc are also propping up freights.

Supply side dynamics

Emission regulations: Supply-side dynamics are closely linked to emission regulations: At present, there are 10,000-odd ships in the dry bulk fleet and the delivery forecast is positive.

UN International Maritime Organisation's (IMO's) regulations on curtailing emissions is "bad in terms of money but good for the economy". European regulations that include charges on the carbon dioxide emitted on the total journey ensure ship-owners will have to buy carbon tax which eventually translates into more freight costs.

Resultantly, older, more polluting ships will become prime candidates for demolition. So, demolitions next year and for a few years ahead will be high, putting pressure on the supply side, which will again raise freights.

At present, 6-7% of the total fleet is being built against 70% 10 years back.

Captain Sanjiv Bhargava, CEO of Hong Kong-based Bulk Marine, observed that at present, the greatest challenge shipping faces is that of decarbonisation although he feels nothing is going to happen soon because the IMO is collecting data and studying pollution parameters.

The IMO is considering a carbon price for shipping emissions that could range from $50-200/t, with a

starting price of $150/t which Bharagave said is a huge cash outflow from ship-owners' pocket. "Parameters are based on historical performance but there can be lot of changes in speed and consumption and the carbon footprint coming out of that. Owners get penalised even for congestion when there is no fault of theirs," he said, adding that ship-owners' exposure for emissions should be limited only to the voyage.

Manish Gulati, Director, Commercial, InterOcean Shipping, said the core problem does not lie with the ships but the fuel.

Ship-owners are confused as to the kind of ship to procure since several fuel names are doing the rounds, from ammonia, methanol to hydrogen, with the latter being a distant option. There are also safety and training challenges while retro fitting costs are huge and not viable financially.

Ships are slow-steaming for a couple of years now and engines cannot be brought down any further. "The basic technology available with shipping right now is slow steaming. But CCUS is the most viable and alternative at this juncture," he added.

Freight forward

The freight market saw a substantial increase in 2021 but which reduced in 2022 and 2023. Good recovery in charter rates was seen in 2024. "We feel average freight costs in 2024 will be more than 2023 levels and further go up in 2025 because of the supply-side reasons," Sharan said.

If no further black swan event happens, based on pure demand-supply dynamics, freights will be higher next year but start pulling down from 2026 because new deliveries will start at this juncture.

Gulati said, as we move closer to 2030, India is slated to become No.3 while Europe is a diminishing economy. The area of action is now 1,000 mnt of commodities moving in Asia, i.e. Vietnam, China and India, and he reminded there are no regulations in these geographies.

He also said, India, rather than China will be the new kid on the block. Because, unlike the latter, India is a consumer-based economy. So if China is cutting down on steel production, India is going to double the same in five years to 250 mnt. Thus, 60 mt of coking coal will grow to 150 mnt. "If volumes go out of China then India will offset that and the freight market will look at it as the next trend setter," he concluded.