Who is the winner of the second quarter? Crude oil, bonds and technology are not the right answer. The winner in the last quarter was the market for transporting iron ore to China, the Baltic Dry Index.
The index recorded a gain of more than 40% in the second quarter. According to Bloomberg data, the performance of ETFs tracking the index beats all non-leverage ETFs. In July, the index continued its upward trend and rose by more than 20% in just three weeks.
Dry bulk rate fluctuations
Dry bulk shipping freight rates fluctuate in the short term, but are affected by supply and demand relationships for a long time. On the demand side, the Sino-US trade war has made the economic outlook unclear. Iron ore transportation is one of the most important categories of dry bulk cargo, accounting for 28% of the total dry bulk shipping. China is a major player in iron ore transportation, accounting for 81% of global iron ore import demand. According to Clarksons, China’s iron ore demand is expected to increase by 1.5% in 2020, which is lower than the average of 5.6% in the past 20 years. The recent resumption of supply at the Brazilian mine recovery, coupled with a sharp surge in iron ore prices, has led to fluctuations in dry bulk prices since the second quarter.
New regulations lead to insufficient supply
Dry bulk rates may be driven by new emissions regulations, resulting in accelerated decommissioning of older vessels. Beginning January 1, 2020, the International Maritime Organization (IMO) will begin implementing a new Sulfur content restriction regulation, which has dropped sharply from the previous 3.5% to 0.5%. Many ship owners will be equipped with scrubbers to hedge the cost of using environmentally friendly energy. According to Clarsons, about 7% of dry bulk vessels have scrubbers, which account for 25% of confirmed orders. This means that many vessels still do not have scrubbers installed, and many vessels will need to use environmentally friendly energy. If the fuel price rises, many vessels with higher operating costs will be forced to scrap.
Iron ore replenishment stocks have become an important driving force for dry bulk transportation in the second half of the year. Coupled with the retirement of many vessels, vessels are in short supply, and freight rates and shipping profits are expected to bottom out in the second half of the year. Looking into the future, trade war risk will affect long-term transportation demand, and it is still too early to talk about the bottoming out of shipping industry.