Jeffrey Landsberg from Commodore Research highlights China’s hydropower capabilities as something for dry bulk owners to watch.
Dry bulk freight rates, particularly panamax and handymax rates, fared relatively well through much of April even with a steady supply of new vessels (particularly ultramax newbuildings) continuing to be delivered to the market. One key issue that Commodore has continued to stress, however, is that this year’s South American peak grain export season has been atypically strong. From the start of March through mid-April, approximately 225 South American grain cargoes came to the market (while the same period last year saw approximately 185 cargoes). The robust cargo volume this year has provided support to the panamax and handymax markets, with strength in panamax rates particularly reliant on what has been a very atypically strong South American grain export season.
Such a large amount of South American grain cargoes previously surfacing this year has masked what in reality is still a weak panamax market. Commodore is most bearish for the 2016 panamax market and is especially concerned for this segment of the dry bulk market starting in late August once the South American peak grain export season comes to an end. The end of the grain export season in South America will be coinciding with the peak in India’s monsoon season along with China’s own rainy season. Hydropower production is set to be much higher in each of these major coal importing countries this summer which will have an adverse effect on coal import prospects. Chinese hydropower production is likely to be especially strong, and is also set to mark a drastic change from the contraction in hydropower production growth seen in China during much of last summer.
Going forward, there remains a very strong likelihood that this summer will see much stronger hydropower production growth in China than was seen in 2015. As we have discussed in several reports last year and this year, 2015 saw Chinese hydropower production increase year-on-year by only 5% which paled in comparison to the very robust 25% growth in Chinese hydropower production that was seen in 2014. This year, though, has so far seen Chinese hydropower production increase year-on-year by 19% and the upcoming summer months are likely to see a much larger surge in hydropower production than was seen during the summer of 2015.
The dry bulk market caught a break last year with Chinese hydropower production growth being very limited, but this summer is very unlikely to see that same result and Chinese coal imports will be negatively affected. It is remains very important to recognise that Chinese hydropower production contracted on a year-on-year basis during July, August, and September of last year.
The panamax and handymax markets have fared fairly well recently, but there are major issues that these markets still must face in Q3 and we remain most bearish for panamax prospects.
South America’s peak grain export season eventually coming to an end and China’s hydropower production growth being set to be much stronger this summer than seen during the summer of 2015 are two major demand-side issues that are still set to arise in the market.
Dry bulk newbuilding delivery volume, of course, also becomes much more significant as the months progress (cargo volume waxes and wanes at times, but the number of new ships added to the market only grows).
Handymax and panamax markets are each affected by the delivery of panamaxes, ultramaxes, supramaxes, and handymax vessels. However, the panamax market has long been the weaker of these two markets, and the panamax market remains most vulnerable. We remain most concerned for the demand and vessel supply-side issues that that panamax market is still set to face later this year.
This article first appeared in the latest edition of Maritime CEO magazine, which launched this week. Readers can access the full magazine for free by clicking here.
