Trading giant Cargill sees upside potential later this year in the depressed dry bulk shipping markets in expectation of a recovery in Brazilian and Australian iron-ore exports and a US-China trade agreement.
Weather and industrial incidents, coupled with trade and geopolitical tension, have pushed spot earnings for bulkers below $10,000 per day this year across the vessel classes.
For much of the past month, capesizes were even earning less than panamax, supramax and handysize ships.
However, Cargill Ocean Transportation head of market research and strategy Eric Aboussouan believes capesize rates are likely bottoming out if the iron-ore supply disruptions in Brazil and Australia — which seem mostly temporary in nature — can be resolved.
“We see more upside than downside, which is not difficult” considering the current rate weakness, according to Aboussouan, whose unit handles the trading giant’s shipping operations.
Vale had expected iron-ore sales to fall by 50 million tonnes to 75 million tonnes this year after a burst dam forced the Brazilian miner to close several mines in January.
In Australia, last month’s Cyclone Veronica prompted Rio Tinto to reduce iron-ore production by six million tonnes to eight million tonnes and BHP by 14 million tonnes on an annualised basis.
“If you add up … we are getting close to 100 million tonnes of iron-ore losses,” Aboussouan said.
We see upside in the coming months. Not a huge upside, but certainly in the second half of this year
However, some market participants expect firm iron-ore prices will incentivise the mining giants to raise shipments as soon as they can.
“We see upside in the coming months. Not a huge upside, but certainly in the second half of this year,” he said.
Smaller vessels recovering
As for panamax and supramax bulkers, their earnings have recovered since February as the start of the grain export season in South America is underway.
Looking forward, the rate environment should strengthen further if the US and China can find a resolution to their trade dispute, according to Aboussouan.
“Today, the expectation is there will be a deal between the two countries in the coming weeks. As a result, we should see China come back to the US market to buy soybean,” he said.
Since Beijing imposed a 25% tariff on US soybean imports last July, Chinese firms have bought less from the US — previously one of their main suppliers.
Chinese imports of US soybean could recover to about 25 million tonnes to 35 million tonnes per year, Aboussouan predicted. “Significantly more than today, which is close to zero,” he said.
This could support demand for panamax and supramax bulkers in the Atlantic trade towards the end of the year.
While China partially replaced the US with Brazilian cargoes late last year, the overall purchases of the world’s largest soybean importing nation were “much lower”, Aboussouan said.
The Chinese are expected to buy more US soybean when the export season begins in September.
China could even “overbuy” American soybeans in the fourth quarter at the expense of Brazilian exporters, as a gesture of goodwill to the US in improving the trade balance, according to Aboussouan.
The sentiment will definitely improve, but we need to wait for three to four months for that [trade deal] to translate into physical flows
“The sentiment will definitely improve, but we need to wait for three to four months for that [trade deal] to translate into physical flows,” he said.
While Cargill has long been an advocate of free trade, Aboussouan noted that geopolitical and trade tensions have played an increasing role in seaborne trade in the past 12 to 18 months.
Other than the ongoing trade war, China and the US have also separately altered the trade flows of other countries via sanctions, tariffs and non-tariff trade barriers on various occasions.
“There has been significant change in geopolitical space and macro-landscape. It’s difficult to think that all this will disappear the day China and the US sign the deal,” Aboussouan said.
“The reality is we continue to be in a volatile environment whether it’s due to disruptions to supply chains or geopolitics.”
When asked how shipping players should respond to those seemly uncontrollable factors, he said: “Every single shipping company or even charterer needs to have very good risk-management capability, [and] very good analytical ability.”
“When some of the issues are too difficult [to anticipate], you need to have the agility to respond quickly to those changes.”