Dry bulk — the world’s largest ocean shipping market in terms of volume — is off to one of its worst starts ever in 2023.
The sector’s famous bellwether, the Baltic Dry Index (BDI), is viewed in financial circles as an important indicator of global economic health. The BDI fell to 530 points on Thursday, down 91% versus October 2021.
Since London’s Baltic Exchange began publishing the BDI in 1985 (originally the Baltic Freight Index), it has only been lower than it is today during two other periods: in the first half of 2020, at the height of pandemic lockdowns, and in the first half of 2016, during an extreme downturn for the dry bulk sector.
This sounds like an ominous sign for the world economy. But there are industry-specific reasons why things may not be quite as dire as they seem.
‘A dearth of cargo’
One reason is that the BDI, over the years, has increasingly become more of an indicator on China than the world at large. And China is currently recovering from its abrupt reopening after extensive lockdowns and a subsequent wave of COVID infections — it is in the midst of a one-off event.
The BDI is 40% weighted to spot rates of Capesizes, bulkers with capacity of around 180,000 deadweight tons (DWT). Capesizes rates, in turn, are heavily driven by long-haul iron exports from Brazil to China.
Volumes on this particular route are always low at this time due to heavy rains in Brazil, but this year they’re particularly abysmal.
“It has been an exceptionally weak start of the year,” said Ulrik Andersen, CEO of dry bulk shipowner Golden Ocean (NASDAQ: GOGL), during a quarterly conference call on Thursday. “Q1 is seasonally the weakest quarter, but clearly rates are now very, very low — lower than most expected, certainly ourselves.
“The reason why we are where we are is primarily due to a lack of iron-ore exports out of Brazil. It is that simple. There is no iron ore flowing as we speak.”
According to Breakwave Advisors, “A dearth of cargo flow, especially out of Brazil, has driven Capesize rates to almost zero as seasonal weakness is now in full swing. As a result, owners prefer to stay in the Pacific … which in turn has also driven rates in that part of the world to multi-year lows.”
Argus Media reported “large gluts of tonnage in the Atlantic and Pacific basins, causing some shipowners to hide the positions of their ships to avoid further downward pressure.” (Hiding ship positions gives the illusion of fewer vessels available to move cargo.)
Brokerage Fearnleys said Capesizes are “burning cash,” calling this Wednesday’s Capesize index rate of $2,600 per day “miserable” and “tragic.”
Clarksons Securities estimated that spot rates had fallen even further by Friday, to $2,200 per day.
Nevertheless, many dry bulk ships are still earning money, despite indexes being deep in the red.
The reference vessels used to assess the BDI burn more expensive very low sulfur fuel oil (VLSFO). Bulkers with exhaust gas scrubbers burn much cheaper high sulfur fuel oil (HSFO), so they earn considerably more than the index reference ship.
Clarksons Securities estimates that Capesizes with scrubbers currently earn $2,300 per day more per day than those that don’t — equating to more than double the day rate — due to fuel cost savings.
Since the international fuel sulfur rules came into effect in January 2020, dry bulk owners have invested heavily in scrubbers. According to Clarksons, 44% of the world’s Capesizes have scrubbers installed, burning HSFO, not VLSFO.
Golden Ocean has scrubbers on 48% of its fleet of 93 vessels. Star Bulk (NASDAQ: SBLK) has scrubbers on 120 of its 128 ships.
Because so many large bulkers now have scrubbers, with even more being added, the Baltic Exchange’s decision to base its assessments on non-scrubber reference ships — a decision that was aggressively contested prior to the IMO 2020 rule on fuel sulfur — means its dry bulk indexes are increasingly “not reflective of the reality of the market,” what critics of the decision predicted would happen back in 2018 (see 2018 story predicting the current situation here).
Slow steaming effect
Ship speed is another factor in the disparity between dry bulk indexes and actual earnings.
During a conference call on Friday, Star Bulk CEO Petros Pappas explained, “If you look at the [index] spot rate of around $2,500 per day for Capes, that is based on a speed of 13 knots. But in situations like this, we slow steam, and that $2,500 actually ends up at $8,000 per day, because we burn much less fuel oil. Then, you add the scrubber benefit” and the actual rate ends up higher still — in Star Bulk’s case, above breakeven.
Average bulker speed has decreased 3.2% over the past year, Pappas said, to 11.3 knots.
Add it all up and public companies are reporting rates well above Baltic Exchange assessments. In the fourth quarter of 2022, Golden Ocean’s Capesizes averaged $21,000 per day, $7,000 per day or 50% above the average index level. Its Panamaxes (bulkers with capacity of 65,000-90,000 DWT) earned $19,000 per day, $5,000 per day or 36% above average index levels.
“The premiums are driven by our modern fuel-efficient fleet, fixing paying [time charter] contracts, and scrubber premiums,” explained Andersen.
Despite what spot indices imply, Pappas said Star Bulk should be profitable in both the first quarter of this year and the second.
Optimism on China reopening
There remains a surprising degree of optimism toward dry bulk despite the collapse of the BDI. One reason is the connection between rates and global GDP, and growing sentiment that the world will avoid a recession this year.
Another is the much ballyhooed “China reopening” trade — the idea that once one-off COVID fallout passes, China will resume higher industrial activity and thus higher bulk imports. If China does rebound, dry bulk is more leveraged than any other shipping sector to demand upside.
“We are not out of the woods yet, and it will take time before the Chinese efforts to revive the economy translates into increasing demand … but we are starting to see signs that a recovery of the dry bulk markets in the second half of the year is realistic,” said Andersen.
That optimism can be seen in the behavior of dry bulk stocks in relation to the Breakwave Dry Bulk Shipping ETF (NYSE: BDRY). BDRY is an exchange-traded fund that purchases freight derivatives, created by Breakwave Advisors to mimic the BDI. As spot rates fall, so does BDRY. Dry bulk stocks, in contrast, are driven by investor sentiment.
Since the start of this year, BDRY is down 28%, declining along with rates as designed. The stock price of bulker owner Genco Shipping & Trading (NYSE: GNK) is up 18% year to date. Eagle Bulk (NYSE: EGLE) is up 15%, Golden Ocean 14%, Star Bulk 12% and Safe Bulkers (NYSE: SB) 12%.
Dry bulk earnings roundup
Dry bulk owner earnings announced this week highlight the disparity between indexes and actual rates in the scrubber era.
Star Bulk reported net income of $85.8 million for Q4 2022 compared to $300.2 million in Q4 2021. Adjusted earnings per share of 90 cents were in line with the consensus forecast for 89 cents.
Star Bulk has 57% of its Q1 2023 available Capesize days fixed at $18,126 per day, compared to $19,682 per day in the fourth quarter. It has 75% of its Q1 2023 Panamax days fixed at $12,337 per day, versus $19,702 per day in the fourth quarter.
Golden Ocean reported net income of $68.2 million for Q4 2022 versus $203.8 million in Q4 2021.
According to Clarksons Securities analyst Frode Mørkedal, “Golden Ocean has booked 66% of its earnings days in the first quarter at $13,800 per day, which is comfortably above the fleet’s cash breakeven rate of $12,000 per day.
“This accomplishment is especially noteworthy given that the Baltic Capesize Index has been less than $8,000 per day this year.”
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