October 7, 2021

Dry bulk freight rates pushed higher this week, fueled by rising coal demand

Coal shortages in Asia have prompted a surge in fixtures at a time when vessels are already in short supply

Capesize rates hit new highs this week, exceeding $80,000/day, according to the Baltic Exchange, the first time it has breached this mark since 2008 and up over 400% since January. The rally is not confined to Capes, with rates across the dry bulk spectrum up significantly since the start of the year.

Surging coal demand is just the latest factor supporting the continued rise in dry bulk freight this year. On its own, coal is unlikely to have propelled rates to the levels seen this week, but in conjunction with covid-related port delays and higher demand for dry bulk commodities as economic output recovered this year, vessel supply has crossed a tipping point into a severe shortage.

The shift in emphasis towards coal is evident from projected loadings data for October. Across all vessel types, global coal loadings this week are set to hit 36.3 Mt, up 7.4 Mt w/w. Loadings next week are at 32.3 Mt; even with some slippage, it shows a clear upward trend.

Coal share on Capes begins to rise

Much of the increase is on Capesize vessels, where a slight but notable increase in the share of coal cargoes carried is emerging. Next week, projected coal loads on Capes are set to jump to 7.2 Mt, up from the current four-week moving average of 4.4 mt. For the last week of October, fixture data show a broadly even split between coal and iron ore cargoes. While this will undoubtedly ease in favor of iron ore as we get closer to the lifting date, the early bookings for coal - which typically only make up around 20% to 30% of Capesize employment - reflect the urgency in the market to secure coal. Therefore it is likely a factor driving rates higher at present.

This trend is also evident in smaller vessel sizes. From Handysize to Panamax (10,000 dwt to 77,999 dwt), coal accounted for 80% of loads over the last three years, but this has increased further to 88% in recent weeks.

Weekly global coal exports by vessel type (Mt)
Flat domestic coal production in China and rising power demand are spurring imports

China is the prime import driver at present, lifting demand for most vessel segments. Higher electricity consumption is driving demand, but domestic production is broadly flat with year-earlier levels, forcing an increase in imports. For the smaller vessels of Handysize to Panamax, a key driver has been higher exports from Indonesia to China. Volumes on these vessels had been steadily rising, even before the unofficial ban on Australian coal, but it has increased further this year. Flows to China from the Russian far eastern ports of Vanino and Shakhtyorsk are also up this year. While this short-haul voyage has mainly boosted tonnage under 78,000 dwt, Capes and Supramaxes have also benefited.

On larger tonnage, the current increase in demand for capes comes after a weak period of demand on coal routes after China effectively stopped imports from Australia. This hit the capsize segment hardest. While rates were briefly affected, they have mainly been rising this year despite this, supported by covid-related port congestion and higher demand across other dry bulks.

A shortage of stocks in India may increase imports, pushing rates higher

Arrivals to the second-largest coal importer, India, have declined sharply in recent months, likely in response to rising prices. This has led to a drawdown in stocks, leaving them at critically low levels. This is unsustainable, however, and for coal-fired plants to meet higher demand as the monsoon season ends and industrial output increases, a return to higher imports is inevitable. This will further tighten an already constrained freight market which will most keenly be felt by Capesize and Kamsarmax from Australia and Capsize and Supramax from Indonesia.

Total dry bulk congestion falls from August peak but remains high for Capes in China

While global port congestion appears to have eased slightly from the peak in August, it continues to hamper vessel availability. At present, 14% of the dry bulk fleet (in deadweight terms) has been caught up in congestion for five days or more, down from 16% in August. However, the number of Capesize vessels waiting to discharge off China remains stubbornly high, hitting 7% of the fleet at the end of September.

The last time dry rates reached these levels in 2008, a precipitous collapse followed through the Great Recession. Barring some unforeseen event, supportive fundamentals are likely to buoy the market over the coming months. Congestion created by port delays is, however, an artificial constraint on the market which could be alleviated. But the countries implementing them don’t appear to be in a rush to do so for the time being.

Weekly share of fleet in congestion for five days (%)

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