Dry bulk FFA market - Living on borrowed time?

The recent rally in freight rates seem to be living on borrowed time, in defiance to the typical lull that accompanies the summer season. With high rates coming in much earlier in the cycle, one wonders if the market’s stamina will last into the traditional shipping peak period of autumn.

“This is start of an old school roofer but certainly momentum has shifted in the owners’ favour and we wait to see if it can continue.” commented a FIS capesize FFA broker.
Capesize rates have responded well to the market uptrend and registered $13,538 on capesize 5 Time Charter Average on 9 Aug 2017, up a total of $399 since the beginning of the week. The gain was particularly impressive given the public holiday in Singapore this week.

Despite the missed work day, capesize rates closed the gap with a solid performance and sent positive shockwaves to the market.

“The Atlantic made a comeback on Wednesday, on a par with Red Rum in the Grand National in 1973, where the horse came back from 30 lengths behind to beat the favourite on the finish line,” opined a London-based FIS broker.

Galloping on the back of good capesize rates, the Baltic Dry index (BDI) registered 1,050 points on Wednesday, after recording consecutive-days rise of rates since 28 July.   

The bullish freight rates may be a reflection of good steel and iron ore market rally that have pushed prices to a new level. As such, the spot iron ore prices had hit over $75 per mt in the week, while the Tangshan billet prices reached their highest this year with a price tag of RMB 3,850 by Thursday.

Moreover by Wednesday, the most active steel rebar futures prices were near their highest in four and a half years. The abnormal high was attributed to investors on betting tighter supply for the second half of 2017 as stricter environmental restrictions are being imposed by the Chinese authority.

For instance, China’s largest steel-producing province, Hebei is estimated to cut half of its steel production by next month, if the steel mills there fail to comply with new environmental protection measures.

In addition, China’s Ministry of Environmental Protection will conduct a new fourth round of environmental inspections on steel mills across eight provinces and regions, namely Jilin, Zhejiang, Shandong, Hainan, Sichuan, Tibet, Qinghai and Xinjiang during the 7-15 August period.

Thus, with expected tighter supply and yet higher demand of steel, the prices of steel-making materials have skyrocketed and freight rates too benefited from the inflated demand. As such, panamax rates booked a gain of $181 day-on-day to $9,548 on Wednesday.

“This early flurry of Panamax trade was once again largely focused on prompts which saw August trading up to $9,850 while September broke the $10k resistance to print $10,200 high,” said an FIS broker.  

Supramaxes however saw slight corrections throughout the week with better rates on Wednesday with September paid at $9,250 and $9,450 on the October. The supramax time charter average then settled for $8,486 on Wednesday, after losing $48 day-on-day, while handysize dipped to time charter average of $6,848 on 9 Aug 2017, down $66 day-on-day.

So the fall season may have come early for freight rates – it’s certainly unusual to hit the high notes in August but there is still good reason for caution as to whether the high demand for iron ore and steel can be maintained. Until prices stablise or correct to a sustainable value, we will not know if we are living on borrowed time or just ahead of the curve.

Posted 11 August 2017

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Contributed by Titus Zheng, Freight Investor Services (FIS)

Contributed by Titus Zheng, Freight Investor Services (FIS)

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