2020 started almost as bad as the previous year. Pandemic coronavirus outbreak and the oil price war have sent the dry bulk earnings into a deep dive. As the worst of the pandemic seems to lie behind China, the government will for sure stimulate the economy to keep the virus’ aftermaths at bay. Capesize markets are expected to rise again in the wake of such measures.

In the second half of 2019, the dry bulk sector recovered a lot of ground lost during the first six months when the Vale dam disaster led to a severe reduction in iron ore exports out of Brazil. Once overcome, the capesize charter rates started to pick up again and had a run even beyond USD 30,000/d in late summer. On average, the second half of the year saw comfortable rates of USD 23,000/d which seemed a good starting point for 2020. 

As it turned out, a three-tier market for capesize vessels has emerged following IMO’s new low-sulfur requirements. The first segment contains older, non-eco tonnage with limited employment opportunities even below OPEX levels. The second segment consists of newer, fuel-efficient eco-vessels, and the last group comprises the newer, scrubber-fitted eco-vessels. The differences in earnings due to IMO 2020 can be seen in the below graph. But the most interesting effect is that dry bulk owners have not been able to push through significant rate premiums for scrubbers. Apparently, scrubbers are the ‘new normal’: Rates for scrubber-fitted vessels have remained rather at 2019 charter rate levels while non-scrubber-fitted vessels had to accept significant rate cuts.

The seasonal market low around Chinese New Year came along more or less as expected. However, it stayed far longer than usual. The outbreak of the COVID-19 virus starting in China and now spreading across the globe hugely impacts the already battered capesize market. Only a few capesizes have found employment as uncertainty dominates the market.

Weak markets and low charter rates usually are bad for owners but have traditionally been good times for cash buyers and boosted scrapping activities. The overall expectation was that as a side effect of IMO 2020, a lot of older tonnage would head to the beaches, especially with scrap prices at USD 370/ldt. Indeed, the scrapping of capesize vessels is quite high with DWT 3.2m so far this year. But like almost everything these days, this trend might be jeopardized as well due to COVID-19 travel restrictions, closed recycling facilities and reduced recycled steel demand. Furthermore, the age profile of the capesize fleet does not look too promising with only 10% of the fleet older than 15 years.

On the other side of the scale is the capesize orderbook with 11.7% of the current fleet. Under normal circumstances, this is not too bad. However, when taking the situation at Chinese shipyards with its most recent lockdowns and delays into account, the delivery schedule for these vessels will most likely be delayed significantly. This also affects vessels waiting for scrubber refits. It gives a glimmer of hope for owners as fleet capacity might be subdued for a longer period of time.

With the dropping oil price, a new challenge has appeared on the horizon. As it seems, the hoped-for reduction in fleet size and exclusion of older, non-eco- and non-scrubber-fitted vessels may have been too early. The bunker price spread between HFO380 and 0.5% LSGO used to be around USD 300/t at the beginning of the year (see above graph), giving scrubber-fitted vessels a huge cost advantage over older tonnage. At the moment, this price spread has collapsed to below USD 100/t which re-opens the market for older vessels. Especially as slow steaming is still a viable solution under the current circumstances with travel restrictions and mandatory quarantine times in several ports.

It seems that China has seen the worst of the pandemic with stores re-opening and workers returning to their production plants. Economists try to evaluate the harm done to economic growth and trade. Most consider growth to be V-shaped, with a severe but short decline in Q1/2020 and a strong surge thereafter.

China’s annual GDP growth will definitely take a hit and turn out to be below the pre-virus targeted six percent. In the end, this will also depend on the coronavirus’s effects on the rest of the world. So far, the Chinese central bank is reported to have injected almost USD 250bn into the banking system and lowered its reserve requirements. As the Chinese government announced that more spending on infrastructure is needed, we expect to see a significant fiscal stimulus for the Chinese economy, with the capesize market likely to rise in its wake.


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