Why will shipping freights not drop in near term?

Shipping freight rates are not likely to come down in the near future. The market will remain firm, essentially because vessel supply will be under pressure.

Dry bulk fleet CAGR growth from CY'15-20 was 3.3% while in CY'20-26 is pegged at 2.2%, indicating supply side is slowing down. In the current scenario, when freights are rising, ship-owners should have rushed to order new building, but that has not happened. The order book is down to 8% in CY'21 from 16% in CY'15. In fact, there will hardly be any supply growth till 2026, Sanjiv Bhargava, CEO Bulk Marine, predicted, while speaking at SteelMint Engage, a five-day webinar series concluded recently.

In the short term, high demand for coal might keep freight rates high over the next few months. If supply is under control in the mid-term then rates may stay strong in CY'22-23 too.

Freight rates

Handysize, Supramax and Panamax rates have soared from around $10,000-12,000/day in Sept'19 to over $24,000/day in Sept'21, albeit dropping off for a while in mid-CY'20. But Capesize freight has been volatile throughout because it is carrying only one major cargo - iron ore, and to an extent, coal. Capesize rates shuttled from $21,000/day in CY'19 to $14,000/day in CY'20 to well over $30,000/day in CY'21.

If China changes its policy on buying or stocking iron ore this affects capsize freight. Because, Capesize do not have anywhere else to go! Panamx can load iron ore, coal and grains while Supramax and Handymax can do virtually everything, with the latter very prominent in containers.

Why will supply be tight?

Bhargave lists several reasons for the stringent supply scenario going ahead.

• IMO regulations: By CY'30, the International Maritime Organisation (IMO) aims to reduce vessels' carbon emissions per transport work by at least 40% and by CY'50, by 70%. Overall, reduction of greenhouse gas (GHG) emissions will be 50% across the sector. Reminding that shipping will not be completely free of carbon, Bhargava said that by CY'23, two indices - Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) - will come into play. EEXI is a framework for determining the energy efficiency of in-service vessels over 400 gross tonnage that fall under MARPOL Annex VI, while for CII, managers must determine ships' carbon intensity profiles and develop an optimised Ship Energy Efficiency Management Plan (SEEMP) by the end of CY'22.
  
  

Carbon emission controls will change the current landscape of marine fuel and technology being used on ships. One tonne of fuel burnt on ships produces 3 t of CO2. Research is on around future fuels like hydrogen, ammonia, ethanol, methanol etc but importantly there is no visibility on engine technology and fuel beyond 2030, Bhargava informed.

Consequently, ship-owners are not willing to order new ships. "The average age of a new ship is 20-25 years and if ordered now, delivery will take minimum two years. If a new building is ordered in CY'21, under present design and fuel availability, there is a risk for owners whether their ship would be tradable by 2030 under the new regulations or would they have to demolish. Thus, new building is on hold and fleet growth is low for last few years, keeping supply tight against demand.

Existing ships will be classified from grades A to F, the latter being the worst energy-efficient while D,E, and F will be in demolition category.

• No clarity on future fuels: It is not easy to decide on future fuels because huge infrastructure for distribution of the same is required so that ships can bunker everywhere globally. This will take time, and have a cascading impact on vessel supply. "So you either slow steam the ship to reduce emissions or use LNG... some are using methanol," Bhargava said.
  
  
• Second-hand market getting mileage: With fleet growth slowing, demand in the second hand market, where vessels are 10-12 years old, is high at present since owners want to take advantage of the current freight market. Also, by 2030 such vessels would reach demolition age. So CY'28-29 onwards, demolition activity will pick up which will create a supply bottleneck, indicating the freight market is not going to come down any sooner.
  
  

Also, in CY'23-24, when EEXI comes into play, there will be increased demolition activity, which will create another supply bottleneck with hardly any supply growth seen till CY'26.

• Long-term contracts: The shipping market is moving away from spot to long term. Miners like Rio Tinto, BHP etc are already eyeing long-term supply at net zero shipping. This can motivate ship owners to order new building if they can forge long-term contracts with these major miners. New technology and future fuel ships will be more expensive, so owners will be eyeing certain levels of returns which can only come from long-term contracts, but push up freight.
  
  

India and China are spot-oriented markets although the latter recently opted for long-term coal contracts. Long term denotes stability in prices and supply.

Way ahead

Container and bulk shipping business was good and such owners should have adequate capital to invest in new technology as soon as a new fuel is determined, to carry on till 2050.

Dry bulk demand will taper off as pent-up, post-pandemic demand subsides. However, supply chain disruptions will probably not go away in a year or two, keeping freights firm.