Drybulk Uptrends Bring Optimism, Exuberance and Divergence
Though uncertainty pervades all parts of the shipping markets, drybulk has found some strength, against a backdrop of shifting cargo flows- real, envisaged, or completely imagined.
The Baltic Dry Index (BDI), which had plummeted early in 2022, reaching a nadir in February (at levels slightly above “1400”), has now bounced upward, to “2718”. The raw numbers on settlements of Forward Freight Agreements (FFAs) from the Baltic Exchange in London, show the situation mid way through March. With unpredictability surrounding all things drybulk (think new lockdowns in China and shipowners’ cautions about Russian port calls), the smaller vessels were still showing the most nearby strength, with a return to the more “normal” market later in the year—where larger vessels earn higher per diems than their smaller brethren.
The biggest incremental action, upward, was in the larger ships. Capesizes (a composite of five TC trips) were pegged at just above $20,000/day for nearby, but popping upward in a “contango” for positions throughout 2022 (in contrast to the pattern of a Q2 peak for the smaller sizes).
How can this be explained? Look in the direction of China; as evidenced by a Q3 Capesize settle at nearly $34,000/day—traders are looking for a comeback that would bring in more iron ore, and also more coal. Analysts at U.K. based Consortium Maritime, describing a 53% rise during the previous week, said the Capes were going to be benefiting from “an overall upward trajectory as Brazil’s iron ore exports started in earnest due to drier weather conditions.”
Optimism can border on exuberance; analysts at broker Cleaves Securities were indicating spot rate forecasts for Capes of nearly $38,000/day (for 2022) and just under $45,000/day (for 2023). But there is a wide divergence of opinions; the latter $/day figure is more than twice the “Calendar 2023” settlement for the Baltic Exchange’s Capesize composite at $20,543/day (above $/day breakevens for owners of the large vessels, but not by much).
All the uncertainties can be seen further in the views of Breakwave Advisors, known best for their highly successful “BDRY” Exchange Traded Fund, whose latest market report noted that, thus far in 2022, coal has fueled 2022’s growth. But, they express concern that: “Trade flows have clearly shifted in the coal market, and that is helping dry bulk rates overcome the seasonal weakness that would otherwise have subdued freight rates this time of the year.
In its mid March market report, Breakwave’s analysts ponder: “Unquestionably, the wild card will now be iron ore. So far this year, iron ore trading, especially out of Brazil can be characterized soft, at best. As the weather in Brazil improves and demand from China picks up, one would normally expect better flows and thus increased demand for iron ore shipping. However, this year is anything but normal. Commodity prices have seen wild swings, geopolitics are front and center, and a cloudy global economic outlook seems a significant headwind for Chinese housing demand and construction.”
In the Handysizes, the nearby March position in the composite of 10 timecharter routes for 38,000 tonners was settled at $27,250/day, with the April pegged above $29,400/day (part of that “Q2 peak”). Supras (58,000 tonners), similarly, were seeing the March position at around $30,000/day with April’s maturity settled at $31,000/day. The Panamax composite of five timecharter runs was also showing strength in Baltic Exchange assessments; the nearby March was worth around $25,700/day with April and May showing $26,600/day and $27,400/day respectively. In each of these cases, Q2 (April-May-June) was revealing the most strength; Q3 and Q4 showed some easing in the second half of the year—all in contrast to the upward sloping Capes.
Looking forward later into 2022, the Consortium analysts, talking about “trade dislocations” and “commodity flow readjustments”, said: “…we therefore expect unprecedented volatility in freight prices across all sizes, with a more negative bias for the smaller sizes.” This view agrees with the price structure revealed in the forward freight markets.
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