BIMCO: Capesize Segment Has Been Hit Hardest by Coronavirus
- Business & Finance
While the Capesize segment has been massively impacted by the coronavirus, the smaller dry bulk segments are starting to recover towards a profitable territory, according to shipping association BIMCO.
As explained, this is partly due to the seasonally higher grain exports from South America. Nonetheless, as the coronavirus continues to spread, the risks are skewed towards the downside.
The Baltic Exchange Capesize index recently went into negative territory for the first time ever. The index is still in negative territory due to the seasonality, IMO2020 and the outbreak of the novel coronavirus. When looking at the Capesize earnings, the same picture of unprofitability becomes clear. On March 6, average Capesize earnings for a non-scrubber fitted ship sits at USD 2,542 per day, deep in loss-making territory.
On the other hand, the smaller dry bulk segments Panamax, Supramax and Handysize have started climbing away from the loss-making freight rates.
Argentina kicks off the year on a strong note
The first quarter of the year typically marks a slow one for the dry bulk market, partly due to the lunar new year celebrations in China and seasonally low agricultural export volumes from South America.
Yet, an unusually strong start to the Argentinian season has partly prompted a pickup in dry bulk demand and somewhat insulated the smaller dry bulk segments from the effect of the coronavirus. In January 2020, Argentina exported a total of 6.2 million tonnes of grains. This uptick in exports marks a 34% increase in exports compared to January 2019.
Brazilian grain exports down 11%
Brazil claimed the crown from the United States – which has held the top spot for over 20 years – as the largest seaborne agricultural exporter in 2019.
However, Brazil has kicked off the new year on a slow note with low export volumes of grains. Total exports for the two months of 2020 are down 11% compared to the same period last year.
The imbalanced market fundamentals
While seasonally strong grain exports could provide for a temporary lift in freight rates, it is ever worth addressing the elephant in the room — structural overcapacity.
The Panamax, Supramax and Handysize fleet increased by a challenging 4.5% through 2019, and with 25m dwt on order right now it seems unlikely that the fleet will return to a strong balance between supply and demand anytime in the near future, BIMCO said.
Looking at the full year of 2020
“The coronavirus is a massive uncertainty factor, which will limit world economic growth through 2020. While China just now is getting back on its feet, it seems likely the worst is yet to come for the rest of the world,” BIMCO noted.
The shipping association has modelled two coronavirus scenarios and reality has unfolded somewhat like our Scenario 2. In this scenario, focusing on China only, economic activity will start to pick up through mid-March and business activity normalize to baseline by April-May.
As China recovers, dry bulk freight rates follow suit. Meanwhile, conditions outside China have clearly soured in the first ten days of March. That development is putting a lid on the extent and pace of the overall dry bulk market recovery, BIMCO continued.
“The high fleet growth will offset any potential demand growth and, at the very least, the IMO 2020 regulation will adversely impact dry bulk profitability through the first half of the year.”
“Some demand has permanently been destroyed by the economic impact of the virus, and with market sentiment taking a turn for the worse, it seems likely that the dry bulk shipping industry will struggle to be on the profitability side for the coming year,” BIMCO concluded.