In tracking freight rates for 2016, the graph has traversed crests and valleys, bust and boom, sometimes rationally on fundamentals but more often on speculation and sheer euphoria.
The latest evidence from the chart indicates that the Baltic Dry Index (BDI) is progressing forward in race of the tortoise and the hare. By this Wednesday, the BDI inched slowly and steadily forward by two points to 1,204, a great improvement considering its climb from the nadir of 290 points in February.
“The supply/demand picture is favouring capesize owners in the Atlantic, although the sheer lack of activity is giving charterers’ confidence to hold out,” commented a FIS FFA broker on the capesize market this week.
“It’s going to be interesting for sure with the December FFA trading still below index levels and December starting to price later this week.”
Indeed, with just one month to go before the end of 2016, the BDI looks promising at current levels and may even suggest that a structural upturn in the cycle is just ahead. But wait - pragmatism needs to prevail over blind optimism in this case - the recent market movement may be disguised as calm before the storm.
Iron ore, one of the main drivers that has set dry bulk shipping rates soaring has until very recently performed gravity-defying acts that surpassed market expectation. This rally stemmed from the China’s determination in clamping down domestic steel and iron overcapacity.
However, the rally appears to be waning with spot prices scaling back toward $D70 per mt from a 31-month high of over $80 per mt on Monday. This week has seen a massive sell-off on the Dalian Commodity Exchange (DCE) where iron ore futures plunged by 8%, while the Shanghai Futures Exchange (SHFE) recorded its biggest one day fall with steel futures for May delivery contracts slashed by 7.5%.
This means that rather than cling on to the iron ore demand trend, the dry bulk market must look to the ongoing scrapping programme that has helped to bring some much needed equilibrium to supply and demand.
Going forward, a few wildcards are expected to affect the market toward the end of the year and for 2017, namely China’s appetite for steel making materials, as well as whether a Trump-led government infrastructure stimulus spending comes to fruition.
As such, the freight market for 2016 contains all the ingredients of good comeback story – a rags to riches tale or a quintessential underdog plot. Owners will be hoping that it stays that way and that nothing drastic pops up on the home stretch.
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