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Commodities Changing Patterns and Freight Market
The year 2023 witnessed significant shifts in commodity patterns, exacerbated by a difficult economic environment in China and geopolitical tensions, especially between Russia and Ukraine, which led to significant shifts in commodity development. The Chinese economic environment in 2023 posed a challenge, which had a particular impact on iron ore prices and demand for raw materials. The slowdown in Chinese economic growth and strict regulatory requirements impacted infrastructure and construction activity and dampened demand for iron ore. This downturn was exacerbated by environmental policy measures to reduce steel production capacity, which in turn impacted global iron ore prices and trade flows. In December, it was reported that China channelled nearly USD 50 billion of low-cost funds into policy-oriented banks last month, suggesting that the central bank may be increasing funding for housing and infrastructure projects to support the economy.
The coal industry encountered challenges as major Asian economies, including China, Japan, and South Korea, initiated stricter environmental regulations. These nations are diversifying their energy portfolios, aiming to decrease their dependency on coal. Specifically, China committed to diminishing coal consumption between 2026 and 2030 as part of its national strategy to peak carbon emissions—a pledge solidified in the 2021 U.S.-China climate joint declaration. Despite these trends, there was a surprising uptick in coal demand in mid-December, rising by 1.4% in 2023 and exceeding 8.5 billion metric tons for the first time, as per IEA estimates. The agency attributed this increase to an anticipated 8% growth in coal usage in India and a 5% rise in China. Thus, global coal demand is not expected to fall earlier by 2026, while Chinese coal demand is expected to fall in 2024 and plateau through 2026. That said, the outlook for coal in China will be significantly affected in the coming years by the pace of clean energy deployment, weather conditions, and structural shifts in the Chinese economy.
In the grain segment, 2023 witnessed a significant shift in the dynamics of global exports, with Brazilian exports emerging as a dominant force poised to challenge the longstanding leadership of the United States. Historically, the United States has held a prominent position as the world's leading grain exporter, benefiting from its vast agricultural resources, advanced farming techniques, and robust transportation infrastructure. However, recent weather disruptions in Brazil have created opportunities for Argentina's corn industry in 2024. These weather-related challenges, combined with reported delays in Brazilian planting, have paved the way for the United States to potentially enhance its export volumes, particularly in the first quarter of 2024.
Geopolitical tensions, particularly between Russia and Ukraine, coupled with China's growing influence on the global economy have had a profound impact on commodity production, price dynamics and the development of the freight market. In early December, China took measures to stimulate the economy, spreading optimism and setting the stage for a possible improvement in macroeconomic conditions in the first quarter of 2024. Based on Signal Ocean's data, this analysis provides an in-depth examination of trends in freight market prices, bulk flows and demand for key commodities, providing valuable insights into their evolving dynamics.
Freight Market Trends
In 2023, the freight market recorded a price decline compared to the 2022 level, although there were signs of a change in sentiment at the beginning of December. At the end of year there was notable strength in the smaller vessel categories, particularly Supramax and Handysize in the Atlantic region. The first quarter of 2024 presents a challenge, mainly due to increased safety concerns in the Red Sea, causing vessels to choose between routes via the Suez Canal and the Cape of Good Hope. If this trend continues, it's expected to boost demand for tonne-miles and potentially increase freight rates, especially for larger vessel categories such as Capesize and Panamax.
Reflecting on the past year we have taken some indicative examples for the performance of market prices in all vessel size categories, and for the case of smaller vessel sizes, Supramax and Handysize, the routes that recorded a spike in December.
In the Capesize segment, rates from Brazil to North China peaked at over $30/t at the beginning of December. However, this increase was short-lived. At the beginning of the new year, rates no longer exceeded the 25 $/t mark. At the same time, prices for WAust to China stagnated at around 10 $/tonne. For 2023 as a whole, the recovery phase was most pronounced at the beginning of December, although the highs of early October 2021 were no longer reached. (Image 1)
In the Panamax segment, rates also peaked for the Continent/TA RV route in early December at levels of $29/tonne, when last December were not surpassing $23/tonne, while there was a downward correction ending the year returning to a similar level seen from mid-October to early November at below the $25/tonne mark. In the FarEast/RV, we can see a softer momentum at rates not exceeding the $20/tonne mark. The last peak of the market for the FarEast/RV was recorded in March 2022, where market prices exceeded $30/tonne mid-month. In recent days it seems that the sentiment will sustain the levels of the ending year at below $20/tonne. (Image 2)
In the Supramax segment, it is interesting to look at the development of rates in the USG/Continent and Mediterranean Black Sea/Far East trades, where a notable peak was recorded at the beginning of December compared to the weaker environment of the previous months. In the USG/Continent route, market prices peaked at $32/tonne at the end of the first ten days of December, while in contrast to the larger vessel categories, where the recovery did not continue, rates maintained the momentum of almost below $30/tonne, with an increase of around 20% from the level of early January a year ago. (Image 3) In the Mediterranean Black Sea/Far East trade, rates rose from lows of $27/tonne in early August to $40/tonne, with momentum continuing at the beginning of the year. It remains to be seen whether the first quarter will maintain the strength of these days, as rates started similarly firm in January last year, only to fall in the following days in February and March.
In the Handysize segment, USG-USAC/Cont route, an outstanding trend reversal was observed, with prices firming to over $30/tonne and holding in this range since early December, whereas in July they could not even reach $20/tonne. (Image 4) In the Brazilian market, there was a rise to $50/tonne for Brazil/Continent route, from the beginning of December to the end of the month, although prices now appear to be fluctuating below this trend, but are still significantly higher than in the summer season, when prices in July and August did not exceed $40/tonne.
In addition to the aforementioned rate recovery, it's essential to examine the prominent trends observed in dry bulk flows of major commodities from primary exporters to China. These trends are poised to have a substantial impact on the future trajectory of market prices.
Dry Bulk Flows
Iron Ore
In 2023, despite the challenges in the Chinese economy, there was a notable increase in iron ore exports from Brazil to China, facilitated by VLOC and Capesize vessels. In the first quarter, there was a decline in Brazilian iron ore exports. However, there was a significant upturn at the end of the third quarter. An annual increase of 13% was recorded in August, followed by an increase of 11% in September. The peak of this unexpected growth was reached in December, when Brazilian iron ore exports to China reached their highest monthly volume since the beginning of 2022. In December, exports reached a peak of 30 million tonnes, representing a remarkable increase of 30% in the month and 24% compared to the December figures of the previous year. (Image 5)
Coal
In the coal sector, Indonesian exports to China demonstrated greater dynamism in the final months of the current year compared to the monthly volumes from Russia using Panamax and Supramax vessel sizes. As depicted in Image 6, December's monthly volume surged to 20 million tonnes, echoing the previous peak witnessed in March 2023 when volumes surpassed the 20 million-tonne threshold. Reflecting on the first quarter of 2022, Indonesian coal exports to China had experienced notably subdued monthly volumes.
Regarding the Russian Federation, a significant shift was observed in the monthly volume of coal exports to China towards the end of the last year. Starting from September, Russia faced challenges in increasing coal sales to Asian markets, while exports from Indonesia and Australia began to strengthen their positions. (Image 7) In November and December, Russian coal exports to China experienced notably lower volumes compared to the peaks observed from April to July. It appears that this recent trend is poised to continue into the New Year.
In 2023, the grain industry experienced fierce competition between Brazil and the US in exporting to China. After an impressive start in the first quarter, Brazilian grain shipments to China, especially utilizing Panamax vessels, saw significant peaks in March, April, and July (see Image 8 for reference). However, this momentum decelerated towards the close of the year. Contrary to expectations, Brazil did not surpass US grain exports. As 2024 unfolds, there's uncertainty regarding whether Brazil's grain sector will mirror the dynamism of 2023. Recent forecasts indicate a potential downturn for Brazil's agricultural exports in 2024. Specifically, the Brazilian Institute of Geography and Statistics (IBGE) projects a production of 306.2 million tons of grains, cereals, and legumes for 2024—a 3.2% decrease from the anticipated 2023 output.
Grain
Demand Tonne Charts
In the concluding section of this review, we analysed the year-over-year evolution of tonne days for major commodities across various vessel classes and evaluated the performance of the Baltic Index by vessel size. Beginning with the Capesize segment for iron ore, as illustrated in Image 9, the tonne days exhibited growth surpassing the previous year's figures starting from May. The peak was notably observed in December, coinciding with a surge in the Baltic Capesize Index. Throughout 2023, December emerged as the pinnacle month for iron ore demand in terms of tonne days within the Capesize vessel category.
Within the Panamax segment, the demand growth in tonne days for energy exceeded the previous year's levels solely during the first quarter and then again from November onwards. Concurrently, the Baltic Panamax Index exhibited a comparable trajectory. As depicted in Image 10, there was a notable peak post-November, with tonne days for energy surpassing the preceding year's metrics. However, it remains uncertain whether the current first quarter will mirror the robust upward trend observed in the corresponding period of the previous year with the first indications of January signalling a strong growth.
In the Supramax segment, there was a pronounced decline in demand for the Supramax vessel size, particularly intensifying towards the year's final quarter. Throughout most of the year, growth consistently lagged behind the previous year's figures. A notable exception occurred in October when performance levels surpassed those of the previous year; however, this did not significantly boost the Baltic Supramax Index, as depicted in Image 11. Concurrently, the Handysize segment, illustrated in Image 12, also witnessed a decline in tonne days for agricultural products starting from September. However, this downturn was less aggressive compared to the Supramax segment. At the start of the new year, there is no sign of a revival in growth in tonne-days for agricultural products in both vessel sizes, indicating a continued downward trend in the dry indices.
In the smaller vessel size segments, while there was a downward trend in the evolution of tonne days for agricultural products, especially pronounced in the final quarter of the year, there was a significant uptick observed for minerals in both the Supramax and Handysize segments, as illustrated in Image 13. Consequently, this growth in minerals exerted an upward influence on rate performance as we approached the conclusion of the fourth quarter of 2023.
Taking into account the above parameters of dry bulk flows and the growth of tonne days, the year 2024 is expected to see similar challenges of the previous year with one more additional dynamic factor stemming from the Red Sea escalation of attacks. It seems that the first quarter captures the uncertainty of Considering the outlined parameters related to dry bulk flows and tonne-day growth, 2024 is anticipated to present challenges reminiscent of the previous year, further intensified by escalating attacks in the Red Sea. The first quarter reflects uncertainties surrounding China's economic landscape, with recent stimulus measures bolstering sentiment around iron ore. Concurrently, persistent tensions between Russia and Ukraine continue to jeopardise Ukrainian grain exports. Additionally, the dissolution of the Black Sea Grain Initiative in July suggests its inapplicability in forthcoming months. Analysing market rate trends reveals a promising trajectory in the iron ore market, attributed to increased Brazilian exports to China. Furthermore, within smaller vessel segments, a burgeoning demand for minerals appears to counterbalance the declining trend observed in agricultural products.
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