Stellar start to 2021 prompts optimism for Atlantic Supramaxes
Atlantic Supramaxes entered the new trading year with salvo; time-charter rates for all major trading routes in the Atlantic surged to multi-year highs during what is typically a depressed quarter, fuelling optimism for the coming months. This unforeseen boom in freight rates – which has drawn comparison to the historic bull market of 2006-07 – was underpinned by chronic under-supply of tonnage in the Atlantic, combined with nascent recovery from the coronavirus-induced slump in major dry bulk commodity markets. Such unseasonably strong freight-market performance was especially startling considering dry bulk’s calamitous 2020 following global economic slowdown as a result of the coronavirus pandemic, giving further cause for optimism in the Atlantic Supramax market in 2021.
High commodity, high freight The three major dry bulk commodities, iron ore, coal, and soybeans, all experienced remarkable price recoveries in 2020 following historic lows as a result of the covid-19 pandemic. This exponential growth in soybean prices – in addition to that of wheat and corn - enabled similar price appreciation in Atlantic Supramax freight rates, which skyrocketed in Q1 on the back of fervent buying predominantly from China, where demand for grains is set to augment in 2021. According to S&P Global Platts Analytics, China is due to import a record quantity of soybeans in the 2020-2021 market year (October 2020 to September 2021), in the amount of 100 million mt. The lion’s share of which comes from Brazil, which is expected to produce an all-time high 133 million mt of soybeans in the same time period. Such increase in cargo volume should prove a significant boon to Supramax and Ultramax demand over the course of Q2, as China is due to reach 100% capacity of its 2017 pig herd population by the first-half of 2021 following mass culling in response to the African Swine Fever epidemic in 2018-19, according to S&P Global Platts Analytics.
Favorable supply-side fundamentals
General consensus among market participants as to one of the major facilitators of such strong Q1 performance was the relative under-supply of Supramaxes and Ultramaxes in the Atlantic. The cause of which was the subject of much conjecture, ranging from disproportionate quantity of ships in dry-dock in the Far East in anticipation of a (historically) depressed Q1; congestion in North China; delays in the Panama canal; high bunker prices quashing ballaster interest, and inclement weather causing widespread disruption to loading and discharge operations. Looking ahead, supply of ships has the potential to remain limited as a result of a relatively low-net fleet growth figure for 2021, which is forecast to be much lower in 2021 compared to years prior, according to data provided by Banchero Costa Research. Regulatory requirements, mainly of which are environmental, are also likely to accelerate scrapping while an ageing Supramax fleet further enhances this demolition potential.
Regulatory obstacles
Many market participants have registered bullish sentiment for the months ahead in the Atlantic Supramax market; however, it is worth addressing potential hinderances that may arise in 2021.
While robust fundamentals were predominantly responsible for the atypically strong Q1, other, more provisional factors also played a part. In the Black Sea, Russia – the world’s largest wheat exporter – implemented new taxes and quotas on exports of wheat in an effort to curb domestic food price inflation, sparking an exodus of grain exports from the region as traders attempted to export wheat as much as possible before prices inevitably increased. Uptick in freight rates for Handysizes, Supramaxes and Ultramaxes transpired as a result, exacerbated by a dearth of available tonnage in the region able to fulfil this windfall of cargo requirements.
Russian wheat export duties initially started at Eur25/mt in February, before doubling to Eur50/mt in March and are due to transfer to a floating taxation in June, which will distort price transparency and incur extra costs for exporters, potentially having an adverse effect on demand for freight as a result.
Exorbitant petcoke prices
Elsewhere, petcoke exports out of the US Gulf face question as to their ability to sustain current market levels in the freight market, given a potential ease in demand for US grain exports in favour of those out of East Coast South America. Petcoke prices in the US Gulf grew more than 100% over the course of 2020 as a result of slowdown in US oil refinery processes, which, as a by-product of the oil refining process, tightened supply of petcoke in the region and put unrelenting pressure on prices.
Supply of petcoke is expected to remain tight due to US oil refineries’ increasing tendency to use light crude oil in refinery processes, which yields a lower amount of petcoke compared to heavy crude. Major petcoke importers, such as India, China, and Turkey, have shown a strong preference for thermal coal imports as a cheaper alternative to petcoke. Substitute demand of this scale could threaten the security of freight rates for three of Platts’ petcoke routes out of the US Gulf to India, China, and Turkey in the coming months. - Hugo Mackay, Associate Editor -
