bulk carrier at sea

Photo:Shutterstock/ IVAN KUZKIN

The Dry Bulk Parabola: What Goes…

Barry Parker
Total Views: 2613
October 6, 2021

The drybulk market, where large deepsea vessels transport unpackaged (therefore, “bulk”) cargoes of iron ore, coal (for heating and for steel making), various grains, and a host of lesser known minerals and other movers too big or bulky (“duh”) for containers, has been rising throughout 2021.

Lately, that surge has gone “vertical” or (depending on how adept you are at trigonometry) “parabolic” in September and October. The movement of one widely followed indicator of the market, the Baltic Dry Index (BDI), which is an amalgam of daily hires for vessel classes ranging from Supramax up to Capesize, has brought it above levels not seen since the market’s 2007- 2008 glory days.

The BDI’s move up above the “5000” level in late September prompted one highly respected equity analyst to label it as a “return to the super-cycle”. At the early 2008 zenith, the BDI had reached up above 11,000, before crashing in spectacular fashion later in the year. Now, THAT was a super-cycle!

Capesize Boom

Among the shipping sectors, the large Capesize vessels, typically hauling 180,000 tons of iron ore from Australia or Brazil, usually into China, have received much of the attention; a composite representing voyages with multiple geographies (fronthaul, backhaul and in between but always in nearby time-frames) reached above $80,000/day in very early October.

For comparison only, in a 2008 bout of perhaps prophetic April Fools insanity, this Capesize component had reached $230,000/day on April 1, 2008. So, in this age of Bezos et. all moving upward, one could say that we are 1/3 on the way to the stratosphere.

In explaining the present strength in the Capes, U.K. based Consortium Maritime Trading, an investor in freight futures contracts, both drybulk and tanker, has pointed to: “Congestion around Chinese discharge ports caused by Covid-related restrictions/ more spot fixtures ie last-minute transactions giving strong support/ Brazilian iron ore exports….which imply more physical ton-mile demand.” Consortium suggested that “The Capesize physical market should be taking a breather at this point.”

Another shipping futures investor, Breakwave Advisors, based in New York, also expressed some caution, pointing to the large price discount for contracts on Capesize futures for December 2021 and early 2022 dates, saying: “Our view remains that we are at or close to an inflection point and although spot Capesize rates always might have more room to rally, the risk of focusing on such incremental gains (especially given the diminishing nature of percentage gains) outweighs any return potential.” 

Cautions

In the back of folks’ minds is the one year time charter hire for Capes (reflecting expectations, sort of, over a whole year)- sitting at a bit over $30,000/day. Good money, for sure (the breakeven for Capes is around $15,000 – $18,000/day), but less than half of today’s hires. Though we are seemingly going from strength to strength (with some breathing space in between), the recent downside, only a year and a half ago, has been equally intense, it’s hard to believe that in February, 2020- as the worldwide Coronavirus pandemic was unfolding (with China, the biggest market driver out there, locked down at that time), the market hit a nadir. The BDI was hovering around “500” (yes, 1/10 of its early October value!) and the Capesize composite was flirting with $4,000/day (yes, 1/20 of present). No wonder those investors with any memory are cautious about shipping.

For share investors

For investors who have embraced the drybulk shipping entities (owning actual vessels) where shares are listed, the entire focus has shifted away from the traditional mentality of “buying dips” (in ship hires, through traded futures instruments, or buying “steel” ie actual vessels). Instead, they’ve moved to a more sustained “industrial shipping” style approach, where companies have used their cash windfalls from the past year to decrease their debt loads (a/k/a “de-leveraging”), and, bringing back a pre-2008 practice- to pay dividends to shareholders. 

Consider one listed drybulk entity, Eagle Bulk Shipping (symbol “EGLE”), which plays in the Ultramax and Supramax sectors, was recently the recipient of a “Buy” recommendation from brokers BTIG. Long-time shipping analyst Greg Lewis said that: “EGLE unveiled a new capital return initiative with a focus on dividends from earnings (30% of net income)” in the wake of a large debt refinancing, and that: “With the company’s overall costs lower, the balance sheet improved, and a robust rate outlook at least into 2023, that time <to buy shares>  is now.”

One thing that EGLE and its peers are not doing is buying new vessels; perennial oversupply- linked to mis-placed optimism on the heels of previous spikes upward, has invariably sunk the drybulk markets. Because of uncertainties about future fuel technologies (maybe ammonia?, maybe hydrogen?, maybe methanol?), the vessel “orderbook” (ie the overhang of ships under construction not yet delivered) is at historical lows. Owners are making retrofits and efficiency improvements to existing vessels; all that vessel time in the shipyards is also reducing available supply to haul cargo. 

The above Twitter post shows October 2021 freight futures contract for Capesize composite-with parabolic shape. This is the value of the “midpoint” in the first entry in the table shown below:

The chart above showing extreme backwardation across freight futures maturities, ie the farther out you go, the lower the traded prices (example 2022 Q1, worth approximately $27,200/day based on bids/ offers), versus October 2021 at $76,500/day at the time of the screenshot was taken). The development over time of the top entry (Oct 2021) is shown in the first graph, above the one above.

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