Are We Looking at the Next Dry Bulk Super Cycle? Is It Even a Cycle?

Throughout the first half of the year, talk of a new dry bulk super cycle has been on many lips as commodity prices have soared to multi-year highs. Freight rates and ship values have also risen but although they exceed prices seen during most of the 2010s, they are still far below super cycle levels.

“Commodity prices have staged a comeback and are hovering around or above 2007 and 2008 levels. This has fuelled talk of a commodity super cycle. However, while dry bulk freight rates and ship values are currently high compared to the past 10 years, they are very far from earnings seen during 2007-2008 and there is little to suggest that they are heading that way,” says Peter Sand, BIMCO’s Chief Shipping Analyst.

Freight rates are high. But not super cycle high
Compared to the past 20 years, freight rates have been high during the first seven months of 2021, with all ship sizes averaging earnings that exceed USD 20,000 per day. However, compared to the first seven months of 2007 and 2008, the current rates are still far below.

In the first seven months of this year Capesize rates have average USD 24,970 per day. In the same period of 2008, Capesize rates averaged USD 147,475 per day. As a share of what they earned back in 2008, Handysize rates come closest, but are still far below with average earnings so far this year at 55% of rates recorded in the first seven months of 2008. Panamax and Supramax earnings stand at 36% and 41% respectively.

Higher valuation, higher volume? Not quite so fast
Higher commodity prices are not the key to a super cycle in dry bulk shipping. In fact, no super cycle without the volumes. Although volumes have grown in the first half of this year, the growth hasn’t been enough to justify talk of a super cycle.

Shipped iron ore volumes have grown 4.2% in the first half of this year compared to 2020, reaching 771.0m tonnes. This is the highest first half of the year on record, beating the previous record set in 2018 by 0.3%. However, this does not provide enough evidence of demand running wild. Instead, it seems like the higher prices are driven by restraints in increasing the supply of iron ore, with exporting miners unable to adjust their volumes at the same pace as demand increases.

For comparison in 2007 and 2008, Chinese iron ore imports grew year-on-year by 18% and 16% respectively.

Similarly, the volume of shipped coal has grown modestly from last year, up 3.6%, but remains below the first six months of 2019. To justify talk of a super cycle, much higher volume growth is needed here too.

“The start of the year has brought some much-appreciated relief to owners’ and operators’ bottom lines following years of lower earnings in the dry bulk industry. Although volumes have risen, it hasn’t been enough to fully justify the much stronger start to 2021 compared with recent years. Other factors include congestion at ports due to Covid-19 restrictions as well as disruptions arising from trade tensions,” says Sand.

“Additionally, the higher commodity prices mean that despite the rise in the absolute cost of shipping, it’s share of the total cost hasn’t suddenly spiked. You may be more inclined to accept a USD 5 to 10 per tonne increase on a spot rate if the value of your cargo has increased by USD 100 per tonne,” Sand adds.

Ship values also far from super cycle levels
The value of dry bulk ships is also far below the last super cycle levels. A comparison of the value of a 5-year-old Capesize ship today with August 2008 shows how big the difference is. In August 2008, the ship could be traded for around USD 153 million. Today it could yield just USD 38 million. Although well below 2008 levels, this is still the highest level since December 2014. The price for a newbuilt Capesize ship is USD 39.5 million lower today (USD 59.5 million) than it was in August 2008.

Commodity prices in line with the last super cycle
High commodity prices have offered the strongest evidence of a super cycle, driven by massive fiscal stimulus packages, and fuelling a recovery in demand as global economies claw their way back from the challenges of the COVID-19 pandemic. Iron ore, the biggest commodity for dry bulk shipping in terms of volume, stood at an average spot price of USD 214.4 per tonne in June. This exceeded the strongest month before the Great Financial Crisis when the iron ore price peaked at USD 200.0 in March 2008.

maritime professional