So much has happened in the dry cargo sphere over the past few years that to catch a glimpse of the future, you need only look at the world in which it operates today.

If the effects of the pandemic and the Ukraine war have demonstrated anything, it has been that not everything in freight markets is about supply and demand.

The factors driving freight rates are more complicated than could have been imagined pre-Covid and have set the sector up for an ever-more volatile and complex commercial environment in the coming years.

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Bulker markets had a banner year in 2021, but behind the sky-high freight rates was a simple truth: the global fleet remains incredibly sensitive to changes in supply.

Port congestion and inefficiencies in crewing and scheduling created tighter markets. And super-low levels of new tonnage scheduled for delivery over the years ahead will provide a decent baseline of support. That’s the hope, at least.

The global trading fleet of bulk carriers is expected to grow by 2% by the end of 2023 in terms of deadweight tonnage and by 0.6% by the end of 2024, according to Clarksons Research.

It remains next to impossible to book newbuilding slots for bulkers at major shipyards before 2025. This does not preclude the possibility of other vessel orders, say, for container ships, to be switched to bulkers, but even if this happens, the effects on supply will be minimal.

Clarksons expects 142 bulkers to be delivered in 2025 or later, making 11.8m dwt in total. It is equivalent to 16% of the current orderbook in terms of numbers and 17% by dwt.

But demand is derived from what happens in commodity markets. Research by McKinsey suggests the world of commodity trading will become ever more susceptible to short-term and long-term volatility and boom-and-bust cycles in the decade ahead.

Shipping could be in for a bumpy ride — though not necessarily in a bad way.

McKinsey thinks the volatile outlook for commodities will place increased importance on traders maintaining prompt inventories that can be deployed in the event of market dislocation. This could well lead to spiky freight rates where there are not enough vessels to meet unexpected pockets of demand.

If 2021’s stratospheric dry bulk freight rates taught us anything, it is that the global fleet remains incredibly sensitive to changes in supply. Photo: Rio Tinto

But the current market environment has also altered how shipping companies and their customers perceive risk.

The paper market, long a key part of managing risk in dry cargo, is undergoing a growth spurt. That comes with growing pains.

The overall value of the freight derivatives market in 2022 was just under $50bn, most of which has been generated by dry-cargo futures.

That value looks set to increase as new financial players enter the space and bring with them technology that is new to freight but common in other financial markets, such as algorithmic trading.

Already, funds such as Springfield Capital Management in the US and Squarepoint Capital in London are deploying algorithm-driven commodity technical advisors for systematic trading of freight derivatives.

The machines take the emotion out of trading, but add a greater level of market volatility. Their growing presence in freight derivatives indicates the space is being shunted into the future — and shows the growing willingness of outside players to deploy capital in the market. That can only be a good thing. And as liquidity in freight derivatives grows, this will enable physical players to manage their book with more agility.

In the meantime, all eyes are on decarbonisation. The energy transition will reshape not only the global bulker fleet but also commodity trade flows.

Large commodity players are already conscious of their Scope 3 emissions — the carbon emissions generated up and down value chains by third-party contractors such as shipowners.

Scope 3 emissions are not a top priority for commodity producers right now. The onus remains on reducing Scope 1 emissions, the carbon emitted from sources that they own or control directly.

Before the Ukraine war, it was difficult to imagine a world split in two between West and East. Since then, and with the continued tensions between China and Taiwan, the possibility of rival trading blocs has become ever more real

But the ability to offer lower carbon-emitting sea transport is being pushed by shipping companies as a way of differentiating themselves in a commodified market, and in time, importance will be placed on reducing Scope 3 emissions.

Customers that want to mitigate the environmental impact of their consumption are increasingly likely to demand green products in various forms, creating “green premiums” for commodity sellers and enhancing the importance of cleaner sea transport.

As with so many things in dry cargo, China remains the other big factor to watch. Beijing has its own ambitions to achieve carbon neutrality by 2060, according to government policy documents, but no legal commitments have yet been set.

Economists think China will become the world’s biggest economy before 2037. Its GDP should grow 5.7% each year until 2025 and then 4.7% annually until 2030, according to forecasts published in January by the UK Centre for Economics & Business Research (CEBR).

Beijing’s policy towards reunification with Taiwan will be an important factor affecting the rate of its GDP growth.

Use of force against the island would probably cause Chinese exports to be sanctioned by Western economies, and that is something to consider, given that nearly two-thirds of the bulker orderbook is being built in China.

Assuming a peaceful resolution, China’s GDP is estimated to accelerate 4% each year on average between 2023 and 2027, before slowing to an average of 3.2% growth per year between 2028 and 2037, according to CEBR.

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The country’s constant price GDP in yuan is projected to rise by 67% from the 2022 level.

Before the Ukraine war, it was difficult to imagine a world split in two between West and East. Since then, and with the continued tensions between China and Taiwan, the possibility of rival trading blocs has become ever more real.

Last year, research by the World Trade Organization (WTO) modelled the macroeconomic impacts of a scenario in which the economy decoupled into Western and Eastern blocs. It found decoupling could lead to real income losses of 5.4% on average for the global economy.

But world trade has proved remarkably resilient over the past year of war in Ukraine and shipping has demonstrated its adaptability.

As the war began, it was feared the conflict could cause shortages in commodities in which Russia and Ukraine have a significant market share — wheat, corn, sunflower products, fertilisers and fuels.

But after initial declines for commodities such as wheat, global trade volumes have generally remained at pre-war levels, according to WTO figures. Prices of war-affected goods rose, which has added to inflation around the world, but not by as much as had been feared.