04-06-2021 Capesize bulker rates down nearly 20% this week but outlook looks positive, By Michael Juliano, TradeWinds
Spot rates for capesize bulkers slid throughout the past week but should rise this coming week after hitting bottom, industry experts say. The capesize 5TC, a spot-rate average weighted across five routes, declined 18.3% over the past seven days to $20,933 per day on Friday, pulling the greater market down with it despite rate gains in the smaller asset classes. The Baltic Dry Index (BDI) dropped 6.1% over the same period to 2,438 points, according to Baltic Exchange data. “This week witnessed a correction on the spot earnings for the larger asset class of capesizes which triggered some futures sell-off,” Sevi Katemoglou, shipbroker and founder of Greek broking house Eastgate Research, told TradeWinds. “We would, however, speculate that the physical freight market has reached a bottom and we’d expect to witness a more positive sentiment come next week.”
Capesizes are doing much better on paper but perhaps too well, according to John Kartsonas, founder of asset management advisory firm Breakwave Advisors. FFA rates show only gains through the end of 2021 and the next seven years, jumping as much as $1,257 per day to $34,357 per day for August. “Expectations are running way too hot versus the reality and thus the relationship between the two is the widest we have seen in many years,” Kartsonas told TradeWinds. “That leaves very little room for error, meaning spot rates have to turn up very soon and rally back towards the 30,000 mark where the futures are pointing to. As we said last week, spot and FFAs in capesizes is totally disconnected.” He said he expects that capesize FFA rates will actually “begin to erode” early next week, while the physical rates may start heading upward. “Now, this is shipping and things can change fast, but the risk-reward as we stand is not on the side of the futures, at least based on history,” he said. “Having said that, I do believe by mid-June that capesize rates will begin to stabilize and slowly move higher, but the correction in the spot market has been too deep for rates to reach above 30,000 fast enough to justify the June and July futures levels.”
Katemoglou attributed last week’s slide in capesize rates to strikes and port delays in the Atlantic basin and market reaction to China’s warmings against manipulation of soaring commodity prices. “That being said, we wouldn’t expect these announcements from Beijing to have any meaningful impact on the overall seemingly bright picture for the segment, as supply and demand fundamentals remain positive and give ground to optimistic expectations until year-end,” she said. At the same time, the sub-capesize segment are enjoying higher rates mostly due to China’s demand for grains. “Chinese appetite for grains remains in the ‘almost insatiable’ territory; a combination of the country’s swineherd recovery and the need for inventory restocking,” Katemoglou said. She said premiums are being paid for the smaller ships to carry grains from South America to China, prompting owners to ballast vessels to East Coast South America from China to catch the lucrative trade. “This can prove to be tricky, as an influx of ballasters in the Atlantic could theoretically pressure rates downward but, for the moment, we feel that there is enough cargo volume to absorb available tonnage at strong rates,” she said.
“US grain exports into China are also noticeably up on year-on-year terms, offering further support to the segment, while China is seemingly importing coal from destinations further afar as a by-product of the Sino-Australian trade spat, thus increasing tonne-mile demand for the sub-cape segments.”
So what does all of this mean for the shares of listed bulker owners? “Looking ahead, demand remains strong, supply of iron ore and coal will rise, and inventory levels will have to be restocked,” Jefferies analyst Randy Giveans told TradeWinds. “For all of those reasons, we expect capesize rates to improve in the coming weeks and months. With that, we expect the large dry bulk equities with capesize exposure to rise along with rates.”