⊗

The United Nations defines a ‘supercycle’ as a decades-long, above-trend movement in a wide range of base material prices which follows from a demand shift. In recent weeks three big banks - Citi, Goldman Sachs and JP Morgan - have put forward their positions that we’re at the start of another commodities supercycle. According to Google Trends data, the interest in the term has been at its highest since the 2008-09 global financial crisis, which marked the the end of the last commodity supercycle. Splash Extra research shows supercycle mentions in the media have shot up this month to their highest level for 12 years. Is it realistic, and like the last commodities boom will there be a concurrent shipping rally? “That's always worrying when the media catch on to something,” quips Tim Huxley, the chairman of Hong Kong-based Mandarin Shipping, a man who surfed the upside of the last supercycle with aplomb. Huxley says it is a bit premature to get too excited about a supercycle as we still have so many uncertainties around, whether it be pandemics, trade wars, environmental issues or the underlying strength of the global economy. “There are just as many people predicting recession as supercycles,” he warns. Despite Huxley’s caution, observers of dry bulk rate patterns in February have had plenty of cause for optimism. For instance, the derivative dry freight market recorded by London’s Freight Investor Services (FIS) posted a trade volume of $1bn notional value in the second week of February, the largest trading week of the 21st century, clearing over 75,000 lots across the cape, panamax and supramax vessel sizes. John Banaszkiewicz, CEO of FIS, tells Splash Extra: "There is a lot of talk about supercycles with respect to commodities at the moment, and if the major economies emerge post-pandemic like China has done, this will only add fuel to the clickbait fire.” There is no stable relationship between the absolute level of commodity prices and the level of freight rates The continued growth of the number of participants in the derivatives market is significant, with it recently overtaking the physical seaborne trade dry freight volumes. Supercycles of yore Over the past 120 years, there have been four extended commodity price booms, according to Capital Economics. Each had a unique driving force — two from war recoveries, one due to the Opec shock and the last from China’s rapid industrialisation. Supercycle adherents believe a combination of rising industrial demand and lack of investment in mines and oil exploration will lead to a reflationary boom in the 2020s. JP Morgan posited this month that the "roaring 20s" will be accompanied by easy monetary and fiscal policy, a weak US dollar, and stronger inflation, all supportive for commodity prices. From China’s five-year plan to Europe’s Green Deal and Joe Biden’s economic stimulus plan, policymakers are looking to redistribute economic benefits, help the environment and create versatile and resilient supply chains, according to Goldman Sachs. The bank was the first big name to raise the prospect of a long-running bull streak for commodities at the end of last year. Charles De Trenck, Citi’s Asia Pacific research head during the last supercycle, and now an independent analyst and investor, has been flagging up the commodities rebound longer than most, since at least last September when he first started to clock key indicators flash green. “Underpinning all this have been global growth stimulation policies, as always,” De Trenck says, something he concedes is also extremely dangerous given we have been at this hyper stimulation stage for over a decade. “If we get a good post-Covid recovery into 2022 we will be calling this a supercycle,” De Trenck says, adding: “If we get a recovery in the volatility of money we may be looking at an inflation supercycle where assets will help maintain relative value.” Joakim Hannisdahl, head of research at Oslo-based Cleaves Securities, believes the current miners’ investment cycle supports dry bulk, a shipping segment that has had an extraordinary volatile February with spot and FFA rate graphs resembling the Dolomites. “Looking at commodity prices, it sure should incentivise investments into future production increases,” Hannisdahl says. Of note, BHP, Fortescue and Rio Tinto all paid record dividends to their shareholders last week, amid a very strong financial reporting period for most of the world’s leading miners. Excitement rekindled Khalid Hashim as managing director of Thailand’s Precious Shipping experienced the last supercycle. The last few frenzied weeks on the dry bulk markets has given him pause to reflect that market forces could be aligning for another bulk run. “Personally, I have to go back to 2007/2008 to remember the excitement that we all felt when rates were then on a tear,” Hashim says. “You could call it what you want but supercycle certainly does seem to fit this bull market.” Commodities and shipping have been underinvested in for the last decade for economic and environmental reasons The cross-segment ClarkSea Index jumped by 23% last week to $18,164 per day, 50% above the ten year trend, amid fevered fixing of ships. Clarkson’s weighted index covers all ship types. Also of note, Lorentzen & Stemoco Research last week made its first changes to its estimates for bulk carrier earnings for 2021 since August last year, pushing most segments up by between 40% to 50%, whereby the brokerage now believes capes will be earning $22,750 a day on average this year, calculated on a timecharter equivalent basis with kamsarmaxes projected to be earning $17,500 a day, supramaxes pocketing $15,000 a day and handysizes netting $14,000 per day. “We believe that this will be a year of recovery, marked by a broad-based upturn in demand for dry bulk commodities with strong growth in China being joined by improved prospects also elsewhere, most notably in other-Asia but also in Europe. Newbuilding deliveries are expected to decline in growth to just over 30m dwt, while scrapping is forecasted to exceed 20m dwt, as high steel scrap prices will encourage demolition of ageing bulk carriers,” Lorentzen & Stemoco stated in a note to clients. Charlie Du Cane, commercial director at Seastar Maritime, argues the key question dry bulk owners ought to be asking themselves right now is how much is the current spike in commodity prices driven by demand, and how much is it driven by constraints in supply, and is there a parallel process going on in shipping. “As a handysize operator, it is fairly obvious that it is both - and what is going on in commodities is largely mirrored in shipping,” Du Cane believes. Commodities and shipping have been underinvested in for the last decade for economic and environmental reasons. “On the demand side there is strong growth in commodities, in part driven by the snap back effect of economies beginning to reopen and restock, but also by the global fiscal climate, which is lax without parallel in history,” Du Cane says. The relationship between commodity prices and freight rates It’s important not to get ahead of ourselves, argues Dr Roar Adland, shipping chair professor at Norwegian School of Economics. Rising commodity prices do not instantly translate into profits for shipping companies, he warns. "There is no stable relationship between the absolute level of commodity prices and the level of freight rates,” Adland says, taking crude oil as a good example at the moment - oil prices are up strongly, while tanker rates are in the basement. “The reason is that the oil price currently is driven mainly by financial inflows and OPEC cuts. So, when the commodity guys talk about a commodity supercycle, they mean higher commodity prices, which may indeed be the end result due to easy money and liquidity,” Adland explains. “That may or may not translate into strong freight markets - depending on fleet supply dynamics and realised demand for commodities.” J Mintzmyer, lead researcher at Value Investor's Edge, says he views the overall shipping industry as attractive for both a recovery investment and also as an inflation hedge. Cyril Ducau, CEO of Singapore’s Eastern Pacific Shipping, says that with the global orderbook at historic lows it will not take much for rates to spike. “This shift in the scales of supply and demand could benefit tonnage providers who have a young and dynamic fleet,” Ducau says. The case for caution Nick Ristic, who heads up dry bulk research at Braemar ACM Shipbroking, is a sceptic about the chances of prolonged shipping boom. “This is just the cycle,” he says, arguing that we’re still dealing with the glut of supply from the last supercycle. The dry bulk fleet today is almost three times the size it was in 2004 by carrying capacity, he points out. Dr Martin Stopford, the well known president of Clarkson Research Services, is also not buying into any shipping supercycle talk just yet. The veteran analyst who has been through more shipping cycles than most likes to look at how shipyard capacity tends to echo and amplify any seaborne supercycle, something that today’s yard output does not suggest we’re on track for a shipping boom. “The idea of a shipping supercycle that will make us all rich sounds like speculative smokescreen to me,” Stopford tells Splash Extra. “We are in the trough and it could be a long slog. But money’s cheap and shipyards are emptying fast, so why not enjoy the ride with a little flutter on a new generation of high tech ships?”

Supercycle: Clickbait or reality?

Plenty of indicators are flashing green. Are we at the start of a commodities bull-run, and by extension a boom for shipping? Splash Extra investigates

⊗

To continue reading, please login below or subscribe here.

Read Next

Owners advised to cash in

Measuring shipping hubs

April 2024 Review

The on/off risk premium for tankers

Curse of the dry cargo optimist

Owners advised to cash in

Measuring shipping hubs

April 2024 Review

The on/off risk premium for tankers

Curse of the dry cargo optimist

Maritime CEO Forum Singapore

Maritime CEO Forum Monaco

Advertising

Press Releases

Splash

Splash Extra

Splash Special Reports