Shipping Market Outlook - Container Vs. Dry Bulk: Q4 2022 Update (2024)

Key findings

• Rates may return to the pre-pandemic level in 2023; limited active supply growth driven by regulation (demolitions and speed) may help the market to recover from 2024 onwards.

• With relative strength of the smaller-geared bulker market, the historical earning spread of different size segments became almost irrelevant in 2022; continued strength in minor bulk shipments supported the dry bulk freight rates to the bottom upwards over the past two years. However, Capesize is expected to return to the highest earning segment in 2023, with recovery in demand from mainland China and declining container spillover-related minor bulk demand for smaller segments.

• Mainland China's fundamental demand of steel and iron ore is projected to have a stable growth in 2023 and onwards with policy shifting towards supporting economic growth, including gradually easing COVID-19 restrictions and a series of stimulus packages kicking in by the end of 2022 to support the subpar property sector. Moreover, the 'zero-COVID' policy that shackled large parts of the Chinese economy and potential exponential spread of COVID-19 after the Chinese New Year's holidays in the winter still remain a downside risk in the near term.

• While on the demand side including global recession, high inflation, ailing property market, energy crisis, and 'zero-COVID' policy will be the main topics in the near term, it is the supply that determines the long-term earnings potential. We expect that supply normalization, with 1-2% fleet growth in the dry bulk sector annually for the next few years, will help the dry bulk freight market to recover while the container sector is expected to face supply-side pressure with heavy investment in new buildings.

• Since 95% of vessels in service are still using conventional fossil fuel, with the IMO's CII regulation, many existing vessels will end up paying carbon tax (EU ETS) and higher fuel prices (biofuel-blended), or staying within limited trading routes, and likely being scrapped earlier than the normal historical lifespan of vessels.

Demand: Container vs dry minor bulk

Strength in minor bulk trade and backhaul rates have been heavily linked with the container market outlook. Therefore, we have consistently argued that when container freight rates start to decline, general cargo vessels (multipurpose) and small geared bulker rates are likely to face pressure and decrease together, specifically for the backhaul routes.

As we forecast, with a significant drop in container freight and slower container trade demand growth in response to high inflation rate and endemic consumer pattern, along with reduced congestion, the decontainerized trend has been gradually reversed and some parts of container spillover-related minor bulk cargo have gradually returned to container box already.

• Dry bulk demand is expected to decline by 1.9% in 2022, with weakness in iron ore and grain shipments, before growing again at 2.5% in 2023 and settling at 3.1% in 2024.

• The backhaul trade has been one of the strongest routes, with strength in the container market; softening container rates pose major downside risks in minor bulk trade in 2023.

• Global container trade growth will slow in response to high inflation, endemic consumer pattern, and weaker global economic growth; the global economy on the edge of recession.

Fleet supply

• Annual dry bulk fleet growth will slow to 2.8% in 2022, 2.5% in 2023, and 1.8% in 2024, compared with 3.4% in 2021 with limited orderbook.

• Container fleet growth will increase to 6.8% in 2023 and 8.0% in 2022, downgraded from previous expectation with higher scrap and slippage expectation.

• Fresh contracts will decrease with high prices and limited yard capacity in top-tier yards, while demolition volume will increase with reduced earning and replacement demand.

• The CII regulation, which will be assessed yearly with stricter emission limits, will start to reduce sailing speed from 2024 and the impact may become significant in scrap activities from 2025 onwards with favorable age profile. The CII rating issue would incentivize higher demurrage to reduce idling time and prevent further upside risk in congestion in the coming years.

• While significant drops in freight rates with high bunker prices have already reduced sailing speed, EEXI-EPL will prevent potential speed recovery. However, with the next few years still in transitional period, it is unlikely to see a major impact in speed and scrap from the 2023 regulation with the ongoing energy crisis.

Outlook

• A large amount of scheduled newbuilding deliveries of container vessel capacity starting from the end of 2022 and expected further softening in port congestion, would put the container shipping rates as well as backhaul dry bulk freight rates under further pressure. Now, we assume that container freight rates will continue to decline to an average of about $2,000-3,000 per box (FEU) in 2023-24 from an average of about $7,000 FEU in 2021-22.

• Overall, dry bulk freight rates may return to the pre-pandemic level in the coming months. In the near term, we still expect the volatile path to lower rates in the absence of high congestion and slower-than-expected economic growth with continued weakness in mainland China's real estate sector. However, limited supply growth driven by regulation and lack of newbuilding order will help the market to recover in the second half of 2023 and 2024. In this context, S&P Global Market Intelligence Freight Rate Forecast models predict that the Baltic Dry Index (BDI) is to fall about 30% on the year to an average of about 1,300-1,400 points in 2023 before recovering to an average of about 1,400-1,500 points in 2024-25. Earlier-than-expected change in mainland China's 'zero-COVID' policy or ceasefire agreements in the Russia-Ukraine conflict would remain the major upside risks, while strong domestic coal production and fast-declining container market with global recession remain as major downside risks in the medium and long term.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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