The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. — Ed.
Iron ore and grain trade volume figures continue to rebound, and even coal trade volume is likely to enter a recovery phase. With bulk carrier supply growth slowing in response to decreased ship orders, freight rates are set to rise briskly once demand rebounds.
Demand continuing strong for iron ore and grain; even recovery in coal demand anticipated
We maintain a Buy rating and a TP of W5,400 on Pan Ocean.
Strong trade volume is continuing for major bulk carrier cargoes such as iron ore and grain, and even coal trade volume is upping from its bottom point. China’s iron ore import volume (cumulative as of Oct 2020: 0.98bn tons) is showing an 11% y-y rise. Global grain trade volume is also seeing y-y uptrend on: 1) expanded grain imports to China from the US; and 2) increased trading activity to secure grain due to worries over limited supply stemming from extreme weather conditions and limited agricultural labor forces (due to Covid-19).
While coal trade volume remained sluggish YTD through October on decreased Chinese imports, we note that the Chinese government has recently increased its annual coal imports target by 20mn tons. The expansion in coal imports is to resolve worries towards rising coal prices due to both coal import quotas and supply shortages (due to a series of accidents at Chinese coal mines). Given such, coal trade volume is now expected to recover gradually going forward. In 2021, global bulk trade volume should hit 5.3bn tons (+3.8% y-y), helped by both the escape of coal from its worst point and continued steady trade volume for iron ore and grain.
Supply burden woes to be limited; freight rates to rebound sharply on strengthening demand
Looking at 2020 YTD, global bulk carrier new orders stand at just 9.08mn DWT, the lowest level witnessed since 2000. Bulk carrier order backlog totals 57.05mn DWT (6.3% of global bulk carriers), which is the lowest in recent 10 years. In 2021, new bulk carrier deliveries are expected to be held to 31mn DWT. Assuming bulk carrier scrap of 14mn DWT, the actual net rise is to be only 16.96mn DWT (+1.8% y-y). Given the decline in orders, the growth rate of bulk carrier supply will likely decrease further to 0.5% in 2022.
With bulk carrier supply growth slowing, freight rates are set to rise briskly once demand rebounds. Since news that China is easing its coal import quota, the BDI index (Nov 27: 1,230p) has been on a steady climb.