Supramax shipowners are bracing for a tough finale to a disappointing year as limping grain and petcoke trade in the Atlantic fails to support the monstrous weight of available tonnage.
That has been keeping freight rates low, while hopes for better times in 2016 are quickly fading on uncertainty about demand and a weak paper market, shipping sources said.
The fourth quarter is generally perceived in the Atlantic dry bulk market as one of the busiest times amid the October-November peak of the US grains exports season and the pre-Christmas period when most traders try to close their books before the new year, often leading to more spot cargoes in the market and, thus, stronger freight rates.
However, this year, hopes shipowners might have had for an increase in freight rates have failed to come to life as Supramax rates have softened across the board.
The front-haul rate for carrying 50,000 mt grain cargo from New Orleans, Louisiana, to Kashima, Japan, dropped $3.50/mt from $30.50/mt on October 1 to $27.00/mt on November 20, Platts data showed.
Similarly the 50,000 mt petcoke route from Houston to Qingdao, North China, fell $2.75/m in the same period to $23.75/mt.
Both routes are bread and butter trades for Supramax owners in the end of year business as they represent long-haul trips that take 8-10 weeks for a vessel to complete on a round-voyage basis.
These longer, front-haul voyages, provide vessel owners with a high ton-mile demand and represent the center of inquiry in the Atlantic.
Their weakness in the fourth quarter is an important and troubling symptom for dry bulk vessel owners and operators as, with the backbone of their trading routes being harmed, it penetrates all across the Atlantic.
NOWHERE TO GO
One of the fundamental causes behind this grim picture is the oversupply of tonnage, currently worse than usual. The fall in front-haul freight rates came as the majority of unemployed vessels was crowded in the US Gulf looking to secure cargoes to transport to the Far East.
There are 11 Supramax vessels open spot in the US Gulf with about 20 more available for loading until mid-December, according to shipping sources.
"There is a lot of tonnage for charterers to choose from," a shipbroker said. "Not just in the US Gulf, but also ships from all over the Atlantic, especially in the region between US East Coast and North Coast South America."
A good number of vessels currently on their way to the US Gulf are opportunistic ballasters, including ships travelling from the Mediterranean.
These are vessels that are ready to suffer the bunker expenses for repositioning across the Atlantic, sources said.
The main reason for this late-year wave of tonnage migration in the US Gulf Coast is that, despite its sorry state, the front-haul grain and petcoke market still gives best returns in the Atlantic.
"A Supramax can get a shipowner about $4,750/day for a trip from the Black Sea to the East Mediterranean, while a front-haul grain voyage from US Gulf to Japan pays around $10,750/day," a shipbroker said. "While in both cases rates are much lower than the previous years, the long-haul runs still provide the most money for the longest period of time for shipowners."
The scenario comes on the back of lower inquiry volumes for Supramax vessels in all the major products they usually transport, like grain, scrap or petcoke. That ultimately leaves owners with few earning possibilities across the whole Atlantic.
Indeed, the earnings discrepancy between the Mediterranean and the US Gulf Coast drives even more shipowners to ballast to an already oversupplied market which, in turns, results in a further decrease in freight rates.
UNCERTAINTY OF DEMAND
While vessels are assembling in the US Gulf to compete for grain and petcoke business, it may turn out to be an attempt to chase a leaving train -- the prospects of demand in both markets look quite uncertain.
The US Gulf to China petcoke route will have to cope with new environmental legislation announced by the Chinese government in August and which could take effect January 1 and intends to establish a sulfur content threshold at either 3% or 5% sulfur for the petcoke China consumes.
While the exact threshold level is not yet decided, petcoke out of the US Gulf Coast has sulfur content is excess of 5% and, therefore, would not qualify under the new rules, meaning there is a chance the front-haul petcoke voyage will cease to exist for Supramaxes by early 2016.
At the same time, the uncompetitive price of US grains, primarily the result of dollar strength, is curbing its exports.
"Many farmers are currently just sitting on their stock and are waiting for either the price of grains to increase, the US Dollar to depreciate or both, before they sell anything," a shipping source said.
NOT SUCH A MERRY CHRISTMAS
As both supply and demand fundamentals seem to be working against shipowners, the usual end-year optimism is quickly bleeding out of the market, leaving little hope for a rebound in freight rates before the New Year.
"Freight rates are currently so low that charterers are already fixing most of the cargoes they had left on their books," a shipbroker said.
"It simply does not make sense for them to wait until shortly before the Christmas holidays start," a broker said. That practice has seen freight rates increase in December in previous years.
The outlook for next year was also quite bearish, sources said.
According to Italian shipbroker Banchero Costa, the already oversupplied Supramax market was expected to grow 9.6% in 2016 for 40,000-64,999 dwt Handymax and Supramax vessels. It also predicted vessels in the same category would increase 2.6% in 2017.
