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Industry Report - Deja Vu all over again? Will there be a replay of the 2H2019 dry bulk market recovery in 2H2020?
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Tuesday, July 14, 2020

Transportation & Logistics Industry Report

Deja Vu all over again? Will there be a replay of the 2H2019 dry bulk market recovery in 2H2020?

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

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Refer to end of report for Analyst Certification & Disclosures

  • The Baltic Dry Index (BDI) closed at 1,810 last week, which was 1% higher than the end of 2Q2020, 3% lower than a year ago and 66% higher than year-end 2019. The BDI closed 1,799 at on June 30th and averaged 782 in 2Q2020, which was 32% higher than the 1Q2020 average of 592 and 21% lower than 2Q2019 average of 990.
  • The Baltic Capesize Index (BCI) closed at 3,333 last week, which was 23% lower than the end of 2Q2020, 6% lower than a year ago and 71% higher than year-end 2019. The BCI closed at 4,320 at on June 30th and averaged 1,147 in 2Q2020, which was 1,112% higher than the 1Q2020 average of 95 and 11% lower than the 2Q2019 average of 1,268.
  • The Baltic Panamax Index (BPI) closed at 1,587 last week, which was 26% higher than the end of 2Q2020, 18% lower than a year ago and 42% higher than year-end 2019. The BPI closed at 1,257 at on June 30th and averaged 823 in 2Q2020, which was 5% higher than the 1Q2020 average of 787 and 31% lower than the 2Q2019 average of 1,189.
  • The Baltic Supramax Index (BSI) closed at 835 last week, which was 22% higher than the end of 2Q2020, 5% lower than a year ago and 16% higher than year-end 2019. The BSI closed at 683 at on June 30th and averaged 497 in 2Q2020, which was 17% lower than the 1Q2020 average of 596 and 34% lower than the 2Q2019 average of 753.
  • Upward bias continues into 3Q2020. In contrast to the across the board weakness in 1Q2020, there was an overall upward bias in 2Q2020 and we believe that the dry bulk market is poised for a firmer 2H2020. We remain constructive on the dry bulk market outlook despite the continued overhang of COVID-19 due to firming demand and muted supply growth. While there will be less shipyard downtime since scrubber installations are mostly done and the fear of IMO2020 has passed due to lower fuel prices (and spreads), several factors should keep supply growth under control, including uncertainty about propulsion systems, unknown future emission regulations, tighter financing and volatile dry bulk market conditions. At the same time, scrapping of older tonnage is possible once the scrap yards reopen in Bangladesh, India and Pakistan if fuel prices rebound and/or dry bulk rates fall back again.

Upward bias continues into 3Q2020. In contrast to the across the board weakness in 1Q2020, there was an overall upward bias in the Baltic Dry indices in 2Q2020. In 2Q2020, the overall BDI index was up 32% versus 1Q2020, led by the 1,112% move in the BCI. The BPI index was up more marginally by 5% and the BSI dropped 17% as the 1Q2020 weakness lingered. 

Could 2020 be a repeat of last year? So far, the moves in the BDI and other sub indices are following the same pattern this year as last year. Last year, the BDI dropped 42% in 1Q2019, but staged a recovery and moved higher in the middle two quarters of the year. The BDI averaged 790 in 1Q2019, 990 in 2Q2019 and 2,030 in 3Q2019 before falling back to 1,562 in 4Q2019. 2020 looks similar with the BDI averaging 592 in 1Q2020 and 782 in 2Q2020. While the weakness in 1Q2020 was more severe and BDI averages are lower this year, the 2Q2020 high of 1,799 was well above the 2Q2019 high of 1,354.

We remain constructive on the dry bulk market outlook despite the continued overhang of COVID-19 due to firming demand and muted supply growth. While there will be less shipyard downtime since scrubber installations are mostly done and the fear of IMO2020 has passed due to lower fuel prices (and spreads), several factors should keep supply growth under control, including uncertainty about propulsion systems, unknown future emission regulations, tighter financing and volatile dry bulk market conditions. At the same time, scrapping of older tonnage is possible once the scrap yards reopen in Bangladesh, India and Pakistan if fuel prices rebound and/or dry bulk rates fall back again.

According to Clarksons data from June 2020, the total dry bulk market trade approximates 5.0 billion tons per year. There are two major sectors of the dry bulk market, major and minor.

Figure 1: Dry Bulk Market Asset Classes


Source: Company reports and Noble Capital Markets estimates.

The major bulk sector represents about 60% of total dry bulk market trade. Two commodities, iron ore and coal, represent almost 90% of major bulk market trade. Iron ore is the largest component of the major bulk trade and it represents about 28% of total dry bulk market trade. Coal is the second largest component of the major bulk market trade and it represents about 24% of total dry bulk market trade. Since iron ore and coal represent almost 90% of major bulk trade and most of those commodities are moved on larger dry bulk vessels, like Capes and Panamaxes, rate volatility is very high.  

The minor bulk sector represents the remaining 40% of total dry bulk market trade. In contrast to the major bulk sector, the minor bulk sector is more diversified and less concentrated than the major bulk sector. Combined the three top commodities (grain, steel, and forest products) in the minor bulk sector total about 24% of total dry bulk market trade, or the equivalent of the second largest commodity, coal, trades in the major bulk sector. Grain is the largest component of the minor bulk sector and it represents about 9% of total dry bulk market trade. Steel is the second largest component on the minor bulk sector and it represents about 8% of total dry bulk market trade. Forest products are the third largest component of the dry bulk market trade and it represents about 7% of total dry bulk market trade. The remaining components of the minor bulk trade are very diverse and much smaller, such as cement, bauxite, fertilizer and scrap steel. Given the smaller size and more diverse components, and almost all of the components of the minor bulk trade are moved on Supramaxes, rate volatility in that sector tends to be more muted with high lows and lower highs.

The Baltic Dry Index (BDI) closed at 1,810 last week, which was 1% higher than the end of 2Q2020, 3% lower than a year ago and 66% higher than yearend 2019. The BDI closed 1,799 at on June 30th and averaged 782 in 2Q2020, which was 32% higher than the 1Q2020 average of 592 and 21% lower than 2Q2019 average of 990.

Figure 2: Baltic Dry Bulk Index (BDI)  


Source: Baltic Exchange via Capital Link.

While the BDI average was higher in 2Q2020, the move was mainly attributable to a strong move in June. The BDI averaged 659 in April, up slightly from 601 in March, but dropped sharply in May to an average of 489 before rebounding swiftly to average 1,146. In 2Q2020, the BDI fluctuated in the range of 393-1,799, which is well above the range of 411-976 seen in 1Q2020.

The Baltic Capesize Index (BCI) closed at 3,333 last week, which was 23% lower than the end of 2Q2020, 6% lower than a year ago and 71% higher than yearend 2019. The BCI closed at 4,320 at on June 30th and averaged 1,147 in 2Q2020, which was 1,112% higher than the 1Q2020 average of 95 and 11% lower than the 2Q2019 average of 1,268.

Figure 3: Baltic Capesize Index (BCI)


Source: Baltic Exchange via Capital Link.

The swings were very large in 1H2020, as the significant upward move in 2Q2020 followed a 97% drop in 1Q2020 versus 4Q2019. In both of the first two quarters, the BCI was negative with low points of -372 in 1Q2020 and -48 in 2Q2020. In 2Q2020, the BCI fluctuated in the range of -48-4,325, which is close to the range of -372-1,646 seen in 1Q2020.

The Baltic Panamax Index (BPI) closed at 1,587 last week, which was 26% higher than the end of 2Q2020, 18% lower than a year ago and 42% higher than yearend 2019. The BPI closed at 1,257 at on June 30th and averaged 823 in 2Q2020, which was 5% higher than the 1Q2020 average of 787 and 31% lower than the 2Q2019 average of 1,189.

Figure 4: Baltic Panamax Index (BPI)


Source: Baltic Exchange via Capital Link.

The BPI followed a similar pattern of 1Q2020, with the April and May averages dropping sequentially before staging a solid recovery in June. In 2Q2020, the BPI fluctuated in the range of 599-1,257, which is close to the range of 520-1,068 seen in 1Q2020.

The Baltic Supramax Index (BSI) closed at 835 last week, which was 22% higher than the end of 2Q2020, 5% lower than a year ago and 16% higher than yearend 2019. The BSI closed at 683 at on June 30th and averaged 497 in 2Q2020, which was 17% lower than the 1Q2020 average of 596 and 34% lower than the 2Q2019 average of 753.

Figure 5: Baltic Supramax Index (BSI)