Shipping prices may be heading higher but are 'not super yet,' analysts say

• Shipping rates are at multi-year highs, but have not reached the bull cycle peaks of the past, said Rashpal Bhatti, vice president of maritime and supply chain excellence at mining giant BHP.
• Prices are being driven by a commodity boom, high demand for shipping and congestions at ports as parts of the world economy recover from the pandemic.
• But if inflation becomes a problem, governments could raise interest rates and that could turn the business cycle and shipping cycle around, one analyst said.

Shipping rates may be rising, but they are "not super yet," according to one analyst.

Dry bulk shipping rates surged this year as the global economy bounced back and commodity demand recovered, but some market watchers say the industry may not be headed for a sustained period of robust growth just yet.

"Is it a supercycle? Well, I would say not yet, but it has the potential to become one," said Mark Williams, managing director of Shipping Strategy, a maritime consultancy.

A so-called supercycle refers to a sustained period of high and increasing prices, typically driven by strong demand and low supply.

He said rates for capesize vessels — the largest category of ships that carry dry cargo and raw materials such as grain, iron ore and coal — are around the levels seen in mid-2019. Reuters reported on Tuesday that average daily earnings for capesizes were $31,880 — a jump of more than 10 times the figure of about $3,000 in February last year.

The Baltic Dry Index, which tracks rates for vessels that carry dry bulk commodities, gained about 74% from the start of the year to July 3.

"It's good — (but) really, it's not super yet," he said during a panel discussion at TradeWinds' Shipowners Forum Singapore 2021 earlier this month.

The vice president of maritime and supply chain excellence at mining giant BHP agreed.

"We're seeing rates at multi-year highs, but we don't see them reaching the bull cycle peaks that we've seen previously," Rashpal Bhatti said at the same session.

The last major shipping boom ended in 2008 as a result of the global financial crisis.

Analysts are wary of factors that could derail prices, but see freight rates staying high, at least in the second half of 2021 and possibly beyond.

What's driving prices up?

Several factors have supported freight rates, including a commodities boom that's boosting demand for transportation and economic recovery as parts of the world bounce back from the pandemic.

But government policy and macroeconomics are at the core of the "very strong" markets, said Williams.

Authorities are pumping cash into the system through stimulus measures — and that's been a "key lever" to fuel economic growth, he said.

"This supercharged GDP growth is driving commodity demand, and that's the basis of the strong markets we enjoy today," Williams said.

James Marshall, CEO and founder of shipping company Berge Bulk, said he expects more iron ore supply from Brazil and stronger coal demand from China in the second half of the year, and that's going to be "very positive" for freight rates.

Inefficiencies and port congestion could also contribute to increasing shipping costs, he added.

"Our ships are still getting held up by severe … Covid quarantines," he said during the Shipowners Forum, which was part of Singapore International Ferrous Week.

"If anything, we see that congestion (getting) worse with the delta variant and more problems with … Covid infections," he said. It could lead to "a significant tightening of the market in the second half of the year," he added.

What will keep freight prices robust

Fleet sizes will not grow significantly in the next few years as there hasn't been a big rush to order new bulk carriers, Williams said.

Discipline in not ordering new ships and the phasing out of certain older vessels will also help keep rates higher, he added.

"It's difficult to see the fleet grow very rapidly anytime next couple of years. And that supply side discipline may be what turns what I'm calling the 'mother of all recoveries' into the supercycle," he said.

Shipbuilding capacity is also in short supply when it comes to bulk carriers, Williams added, predicting no more than 3% fleet growth for the next three years.

"If you have demand growth running above fleet growth in any of those three years, you're going to have a firm freight market rate," he said.

Williams said he expects a "really firm market" in 2022 and sees a "very strong chance" of it continuing into 2023. Still, he reiterated his stance that the industry is not yet in a supercycle.

"What we're in is a disruptive global economic situation brought about by the pandemic, and this freight market is being driven by a construction boom, which is a government policy response to that pandemic," he said.

Risks: inflation and rising interest

Government policy could just as easily stop costs from rising further, Williams said.

He said that if macroeconomic conditions remain strong in 2023, the world could be in a "dangerous position" with regard to inflation.

"At that point we're going to see a rise in interest rates from central banks that will inevitably slow down economic growth, and then this business cycle will flip over … and it will take the shipping cycle with it," he said.

On the supply side, Bhatti from BHP said an improving pandemic situation could moderate price surges.

When Covid restraints are eased, congestion at ports will be reduced and free up shipping capacity.

"As that capacity comes back into the market, that will of course dampen some of the … spikes that we've seen," he said.

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