Ocean freight rates drop $10-15/t since Nov. What to expect in mid-term?

Freight rates across segments dropped by $10-15/t since Nov on lesser imports by China. Experts say, prices have bottomed and may recover marginally before Chinese New Year.

Freight rates have cooled down since early Nov'21 across Capesize, Panamax and Supramax segments by $10-15/tonne. For instance, Supramax rates to the west coast of India have dropped to $18-19/t, against the earlier $25-28/t. East coast rates for Panamax have edged down from the earlier $20/t-levels to the current $12/t. Capesize freight from Indonesia to China have also eased from the previous $20-21/t to $12-13/t levels.

Capesize hiring charges have dropped 60% from $50,000/day to $20,000/day while Panamax is down to $18,000-20,000/day from the earlier $40,000/day and Supramax, from $40,000-45,000/day to the current $18,000-20,000/day.

Why did freight rates drop?

• Energy crisis impact: China, while in the grip of its energy crisis, instructed industry segments consuming large units of power to lower production so that the power available could be directed towards household heating. However, subsequently, China ramped up its coal production from 11 million tonnes (mn t) per day to the present 12 mn t - a 7-8% increase in output per day. Consequently, coal stocks at China's power utilities have returned from a low of 4-5 days to around 20 days currently. This means that there is much less seaborne thermal coal movement. "Around 1 mn t per day of coal movement has been offset," says a senior source at Bulk Marine, a dry bulk marine shipping operator.
  
  
• Port congestion lessens: The congestion at Chinese ports reduced drastically as a result of the energy crisis. The production curbs led to lesser power consumption. "There was a short-term demand destruction which led to a sharp drop in coal imports by China and which helped to ease the congestion at ports," informs the Bulk Marine source. For instance, 590 vessels were waiting at Chinese ports in the last week of October. However, congestion dropped 38% to 365 vessels in the first week of November, as per a report by Bulk Marine.
  
  
• China's Evergrande impact: After the Evergrande collapse, where the real estate giant is grappling with over $300 billion of debt, China's real estate sector, which typically consumes around 40% of iron ore and other related commodities, has been negatively impacted. With the realty market down, seaborne trading in dry bulk cargoes has been hit. "And we still have not seen the full impact of this collapse yet," warned another source.
  
  
• Winter Olympics: China wants clear blue skies during the Winter Games and working towards this end, is minimizing use of fossil fuels, which is slowing down global coal movement.
  
  

Vessel freight table

Fig in $/t
Source: SteelMint Research

Recent halt in freight fall

However, there has been a halt in falling freights since the past 3-4 days. The reasons are two-fold:

• Harsh winter: The advent of winter is again leading to congestion at ports. Fog and heavy winds impact ports in northern China and the turnaround time increases by 3-4 days at this time of the year as ships are unable to berth and those discharging find it challenging to return due to the backlog etc. "Since the last 3-4 days, we are seeing signs of logjam building up once again," informs the Bulk Marine source, adding that winter this year is expected to be harsh in China.
  
  
• China stockpiling ahead of Lunar New Year: Importantly, freights are firm because of the current stockpiling under way in China. But this is short-term. In fact, the country has entered its busy season ahead of the Lunar New Year in Feb'22. This last-minute stockpiling stretches from November till mid-December after which a lull sets in till the Chinese New Year. "This particular season is a very busy one. Historical trends reveal that, from November till mid-December, the Chinese stockpile on iron ore and coal for winter. That is why Indonesia is still busy. Activities will start slowing down from January as the Chinese labour force goes on a month's holiday ahead of the Lunar New Year," a source corroborates.
  
  

This could be a reason why iron ore delivered prices have shot up from $90/t to over $100/t on DCE in the last 3-4 days. The iron ore stockpiles at Chinese ports are a huge indicator of prices. Chinese authorities keep stockpiles high to keep speculators at bay. There will still be another month of Indonesian coal supply activity to China.

Outlook

The market in terms of freights has bottomed out and there is limited scope of further falls from here. There could be a marginal spike going forward because of the stockpiling and winter congestion, although these rates will not bounce back to Sept-Oct levels till the Winter Olympics are over.

SteelMint expects the freight market to be back after Mar'22. By that time, China will return to buy in volumes. Its realty issues may be sorted out through governmental intervention. USA will have huge infra spending lined up and would return to the dry bulk cargo market. However, vessel supply will not improve in the near term. All these factors would push up freights somewhat again Mar'22 onwards.