Fertilizer International 523 Nov-Dec 2024
30 November 2024
Dry bulk market expected to cool
BULK FREIGHT OUTLOOK
Dry bulk market expected to cool
The dry bulk market is forecast to cool, after a year of high freight rates driven by demand shocks. Should ships return to the Red Sea during 2025, then the market will weaken even more. This development, explains BIMCO shipping analyst Filipe Gouveia, would particularly affect the supramax and handysize vessels typically used in fertilizer shipping.
Freight rates surged in 2024
During the first three quarters of 2024, the Baltic Dry Index (BDI) was 58% higher on average than during the same period in 2023 (Figure 1). This freight rate increase was supported by a tighter ship supply/ demand balance, particularly in capesize, the fleet segment with the largest vessels. We estimate that overall ship demand will grow by 5-6% in 2024, outpacing supply growth of 2.5-3.5% (Figure 2).
A rise in sailing distances is one factor. These are set to increase by 2.5-3.5% in 2024 (Figure 2), causing a spike in demand because of ships spending longer at sea. Throughout most of 2024, bulk ships were affected by transit limitations in the Panama Canal and higher risks in the Red Sea due to Houthi attacks on ships. The consequent increase in the number of transits around the Cape of Good Hope raised both sailing distances and transit times.
An increase in iron ore, grain and bauxite loadings in the South Atlantic added to longer average sailing distances. Shipments originating from this region – which largely head to Asia – sail for above average distances.
Overall cargo volumes are also expected to grow by 2-3% this year (Figure 2), driven by iron ore and grains.
China has significantly increased its iron ore imports this year, despite a decline in steel production and higher iron ore mining domestically. This decline was particularly marked for recycled steel production, Therefore, which does not consume iron ore as a raw material. Nonetheless, with iron ore supply growing faster than demand, a build-up of inventories in China still occurred.
China’s domestic steel demand has been under pressure since 2021 due to the crisis in its property sector, a major end market. While exports have provided an additional outlet for Chinese domestic steel this year, export volumes have not been enough to keep production stable.
Global grain shipments, meanwhile, benefited from stronger harvests in exporting countries such as Argentina and the United States. Furthermore, despite lower production in Brazil – the world’s largest grain exporter – during 2024, exports from the country were supported by high inventories from the previous year.
On the supply side, the dry bulk fleet is expected to grow by 3% on average in 2024 (Figure 2). January-September ship deliveries were down 5% year-on-year due to a relatively small orderbook. However, high freight rates incentivised the continuing operation of older ships, causing ship recycling to fall to its lowest level since 2008. Easing congestion is also freeing up ship capacity, with this being equivalent to as much as 1% of supply.
Weaker supply/demand balance in 2025
BIMCO is working with two scenarios for its 2025 outlook, a base case and an alternative case, these depending on how long current shipping disruption will last. In our base scenario, ships are assumed to return to Red Sea and Suez Canal routings throughout 2025, whereas in our alternative scenario it is assumed that this will be delayed until 2026.
The ship supply/demand balance is, however, still expected to weaken in both scenarios. A 2-3% increase in supply and a 0.5-1.5% decrease in demand is forecast in our base scenario and a 0.5-1.5% increase in demand in our alternative scenario (Figure 3). Both scenarios could lead to weaker freight rates, particularly in the base scenario.
Sailing distances in our 2025 base case will fall by 1.5-2.5%, while these will remain stable in our alternative scenario (Figure 3). Rerouting away from the Red Sea, due to the longer sailing distances, has contributed an estimated 2% increase in demand. We therefore expect demand to contract by the same percentage when this no longer applies. The continued return of ships to the Panama Canal will also negatively impact demand next year. However, this will be counterbalanced by an expected increase in sailing distances resulting from stronger South Atlantic cargo.
Cargo volumes are forecast to grow by only 1% in 2025. Import demand for the three largest globally shipped commodities, coal, iron and grains, is expected to moderate. Minor bulk cargoes are, however, expected to grow at a faster rate than this.
Iron ore shipments are expected to only grow by up to 1%, with domestic demand in China remaining muted. The Chinese government has announced stimulus measures to boost economic growth and support the property market, but we do not expect these to boost iron ore shipments significantly above 2023 levels. Iron ore inventories in China remain near to historical highs, while new real estate projects are 54% below the ten-year average. Production of recycled steel may also rebound from current low levels in 2025, especially as new capacity is added during the year.
We estimate a 1-2% decline in coal shipments, a commodity that accounts for 25% of all dry bulk cargo. Import demand for thermal coal is expected to cool as renewable energy capacity continues to grow rapidly in China and in the developed countries. Hydroelectric power could also rebound in India and China – the world’s two largest coal importers in 2025 – due to a recovery in water levels over the summer. Additionally, growing domestic coal mining in both markets will continue to threaten imports.
Minor bulk cargoes are forecast to grow 3-4% in 2025. The gradual easing of interest rates in the advanced economies together with the energy transition are expected to support demand. Shipments of bauxite, steel and some ores and metals are expected to strengthen, while shipments of commodities such as wood products are likely to continue to struggle, linked to weak Chinese domestic consumption.
Average monthly growth in the dry bulk fleet is estimated at 3% in 2025, providing a boost to supply, while ship recycling may increase marginally on a cooling market. Sailing speeds, meanwhile, may fall by up to 1% with weaker freight rates encouraging slower sailings to save on bunker costs.
Fertilizer shipping segments are expanding
Over the two years 2024 and 2025, the supramax and handysize fleets are estimated to grow by 8%. That is considerably faster than the 6% growth in the fleet overall. These two segments include the smaller ships in the dry bulk fleet that typically transport fertilizers (Figure 4).
So far in 2024, the Baltic indices for the supramax and handysize segments have risen by 37% and 33%, respectively, signalling higher freight rates year-on-year. Both segments have seen growing cargo demand with rates significantly benefitting from disruptions in the Red Sea and Panama Canal.
Looking ahead, supramax and handysize freight rates may fall in 2025, even if cargo demand for these segments continues growing. That’s because the supply/ demand balance is expected to weaken next year, the main factors being high fleet growth and the recovery in transits through the Panama Canal. Freight rates will fall even further if ships return to the Red Sea.
Panamax vessels, a segment with bigger ships, are also used on a smaller number of trade routes. They are more commonly used for shipments from Russia, China, Canada, Jordan and the UAE to India, Brazil, China and Morocco.
In 2023 and 2024, strengthening shipments for coal, which accounts for more than half the cargo carried by these ships, supported panamax freight rates. Conversely, a poorer outlook for coal shipments in 2025, together with a growing fleet, could lead to weaker freight rates in this segment next year.
China’s priorities could alter outlook
Several other factors – besides the situation in the Red Sea – could still alter the outlook for 2025. Economic activity and policy making in China, the destination of 39% of bulk shipments, could greatly affect shipping market performance. So far in 2024, the Chinese government has been determined to reach its 5% GDP growth target and improve domestic demand. But bulk imports next year could be lower or higher than forecast, depending on the success of the announced stimulus measures, as well as on how much of this stimulus package is directed at physical infrastructure and real estate.
Government policy priorities could also significantly alter import demand. China plans to increase recycled steel to 15% of total steel production by the end of 2025, for example. While recycled steel production weakened in 2024, due to declining profitability, iron ore imports could fall if the recycled steel target was prioritised by China’s government next year.
Coal shipments could also be greatly affected by changes to Chinese government policy. A focus on mine safety caused China’s coal production volumes to drop in 2024, for example, after several years of policy promoting domestic coal mining. Chinese coal imports could therefore either increase or weaken in 2025 – depending on whether mining safety or a mining ramp-up is prioritised. Additionally, the increase in renewable energy capacity in China has negatively affected coal shipments. But such capacity additions could be set to slow, if the government does not respond quickly enough to emerging bottlenecks in the electricity grid.
Lastly, an increase in attacks on ships in the Black Sea, as seen in October 2024, could disrupt global grain supply. While the world is less dependent on Ukrainian grain now, a new blockade on the country could still lead to a drop in global shipments.
Summing up
In conclusion, the dry bulk market shipping rates, after a strong 2024, will likely weaken in 2025. The smaller supramax and handysize segments which typically transport fertilizers could be particularly affected, especially if ships are able to return to the Red Sea. Several other factors could still reshape market conditions, however, with Chinese government policy being particularly influential.
Author’s note
Bulk market outlook as of end-October 2024.
