Hold on to your hats if you have a stake in the dry bulk market! After a strong second quarter, dry bulk rates have soared even further in July and August, with Cape rates topping $50,000 per day and rates for Panamaxes and Supramaxes running close to $35,000 per day.
The driving force behind the latest surge in rates is not obvious to us yet, but we can rule out two of the factors behind the 21H1 rally: Chinese steel production and port delays. Indeed, after growing by 11% yoy in 21H1, Chinese steel production has fallen back in July and August, in response to a government mandate to cut output to bring iron ore prices down. Similarly, after climbing to a record-high level in 21Q2, we estimate that global port delays have since fallen back modestly, though they remain extremely high by historical measures. The latest figures for August show delays at Chinese ports rising, but this has been more than offset by a large drop in delays at Brazilian ports.
But obviously, something is driving the market higher, and that something appears to be demand outside of China. While Chinese steel production was down 8% yoy in July, output in the rest of the world was up an astonishing 22%! Strong gains in Europe, Japan, India and many other countries lifted output above its pre-Covid level. Preliminary estimates also show the minor bulk trades climbing above their pre-Covid level, consistent with the recovery in the global economy.
As a result of these developments, we estimate that the dry bulk fleet utilization rate has climbed towards 92% for the first time since 2010, entering what we will call the “Roller-Coaster Zone,” because of the potential for quick ups and downs we could see when the market is in this range. In order for rates to stay near their current levels (Cape rates at $50,000/day), we believe that fleet utilization would have to average 92% over the rest of the year. While it is possible we could see such a high fleet utilization rate, our Base Case scenario sees utilization falling back to 90% over the remainder of the year, mainly due to a further reduction in port delays, with Cape rates likely to fall to $32,000/day as a result.
However, a further rise in utilization, to 93%, coming from either a moderate spike in demand or another jump in port delays, could send Cape rates above $60,000 per day.
We will be taking a close look at all these factors for the upcoming eBrief, which will be available to our clients in October.
If you have any questions on this topic we would be happy to hear from you.
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