Dry bulk shipping

We are still highly optimistic towards dry bulk shipping, spurred on by the lowest orderbook vs fleet on our record going back to 1996, now at a mere 7.1%. Only 3.5m dwt newbuildings were ordered during 2Q22, far below our 8.7m dwt forecast and the lowest level since 1Q 2017.

Dry bulk earnings have so far disappointed many this year but has nevertheless come in above our rather positive expectations. Our early January forecast for the Baltic Dry Index during 1Q22 was 1,779 (13% below actuals) and 1,762 for 2Q22 (30% below actuals). Our similar forecast from early April for 2Q 2022 was 2,301 (9% below actuals). Looking towards our dry bulk share index, shares outperformed our early January forecast by 10% in 1Q22 and 19% in 2Q22.

Despite that the current market sentiment has suffered some setbacks from a significant (and as we expected) reduction in earnings since the last local peak in October 2021, we remain optimistic towards the outlook for dry bulk. In the short-term, the Russian invasion of Ukraine has led to shifting trading patterns which has partly benefited dry bulk, although not enough to offset continued lackluster levels of iron ore exports from Brazil, amongst other lost volumes. Vale recently downgraded their full year production guidance of iron ore from 320-335mt to 310-320mt for 2022, thus better aligning with our longstanding forecast of 310mt.

Looking further afield, we expect Brazilian iron ore exports to be maintained at levels similar to the estimated 33mt in July which should be supportive for the larger dry bulk vessels. We also see Chinese authorities providing stimuli to the economy amidst negative news from the housing sector and recent covid-related lockdowns, which could support demand for dry bulk commodities from infrastructure projects in 2H22 and into 2023.

Although we do not expect any big surge in dry bulk demand for the foreseeable future, the low fleet growth should sustain average dry bulk earnings at similar levels to 2021. This in itself should be enough to propel share prices higher, now trading at a P/NAV of 0.76 and an EV/EBTITDA of 3x for 2022E. Given that earnings and asset prices are an exponential function of fleet utilization: Only a marginal increase in demand growth above our forecast is enough for the segment to skyrocket. The same can be said for effective supply growth/contraction, with the EEXI and CII coming into effect during 2023. We currently have a 40% long allocation towards dry bulk.