This article has been reprinted from the April 16 USDA Grain Transportation Report.
Many factors combined to slow the global dry bulk trade during first-quarter 2020.
These included holidays (New Year and Chinese Lunar Year), weather-related supply disruptions—and of course, the coronavirus disease (COVID-19) outbreak. COVID-19 has delayed manufacturing activities in China and other parts of the world and, in turn, slowed global trade movements of bulk items. Thus, the dry bulk industry is among those most affected by the COVID-19 outbreak worldwide.
The multi-factor slowdown in global bulk movements reduced ocean freight rates for bulk commodities (including grain) from fourth quarter 2019 to first quarter 2020 (quarter to quarter). Despite multiple reasons for the slowdown, its outsized impact on China—including COVID-19’s first hot spot in Wuhan—caused much of the slump in bulk trade, leading to lower freight rates.
According to Drewry Maritime Research, Inc. (Drewry), China’s gross domestic product (GDP) represents 16 percent of the world’s GDP, and China represents 33 percent of the world’s dry bulk trade. Hence, any large slowdown in China reverberates globally.
We examine the effect of reduced dry bulk trade on bulk ocean freight rates from quarter to quarter, from first quarter 2019 to first quarter 2020 (year to year), and from the 4- year average.
During the first quarter, the cost of shipping a metric ton (mt) of grain from the U.S. Gulf to Japan averaged $43.38, down 10 percent quarter to quarter, but up 6 percent year to year and up 20 percent from the 4-year average.
The cost of shipping from the Pacific Northwest (PNW) to Japan averaged $23.10 per mt, down 12 percent quarter to quarter, but up 1 percent year to year, and up 16 percent from the 4-year average. It cost $14.82 per mt to ship grain from the U.S. Gulf to Europe, down 22 percent quarter to quarter, down 11 percent year to year, and down 1 percent from the 4-year average
As typically happens every year, ocean freight rates started falling with the globally celebrated New Year holidays and continued falling with Chinese Lunar Year holiday (January 25 to February 8). However, additionally, this year, the COVID-19 outbreak began affecting the dry bulk sector in January when the first death from the virus was reported in China.
The epicenter of China’s outbreak, Wuhan, is a major manufacturing hub that uses steel and aluminum. Consequently, the shutdown of river ports in this region hampered steel production and, likewise, iron ore demand. China’s COVID-19 outbreak continued to impact the country’s crude steel production and iron ore imports through February and March.
With COVID-19’s spread to other major industrial Nations in the latter part of the quarter, manufacturing and other trade activities slowed around the world. The ongoing lockdown has affected iron ore and coal production in countries such as South Africa and Colombia (per Drewry).
A South African company, Anglo America, has reduced its current year’s annual production guidance for operations by as much as 1.5-3.5 million tons—less iron ore than the company’s actual production in 2019. Meanwhile, guidance for coal production has been reduced by 1.5-2.0 million tons. Additionally, heavy rains in one of Brazil’s major iron-ore-producing regions curtailed iron ore supply.
Current Market Analysis and Outlook For the week ending April 9, the rate for shipping a metric ton (mt) of grain from the U.S. Gulf to Japan was $38.75—15 percent less than January 2 (first available rate in 2020) and 8 percent less than the same week last year. The rate from PNW to Japan was $19.75 per mt—21 percent less than January 2 and 16 percent less than the same week last year.
Despite COVID-19’s downward pressure on dry bulk trade and bulk ocean freight rates, the pandemic may, also, drive up ocean freight rates in the medium or long term. For example, the pandemic affects shipbuilding activities in the Far East countries like China, South Korea, and Japan, which account for 97 percent of order books. This could reduce vessel delivery.
In 2020, of the 55 million deadweight tons (mdwt) of dry bulk vessels scheduled for delivery worldwide, 30.5 million mdwt are built in China (according to Drewry). Roughly 56 percent of scheduled delivery in 2020, China’s share of that total is projected to increase to 67 percent in 2021.
Besides the slowdown in shipbuilding activities, a greater reluctance by ship owners to take deliveries may further reduce vessel supply. In fact, only 1.8 mdwt of vessel capacity were delivered in February, down 23 percent year to year. Lower vessel supply could put upward pressure on ocean freight rates.
Also, the start of Brazilian soybean season may put upward pressure on Panamax rates as demand for Panamax vessels improves for movements from East Coast South America to China and European Union.
Surajudeen.Olowolayemo@usda.gov