Paper trading and a capesize market 'gone mental'

A speaker during the dry cargo session, Tom Beney, ocean transportation manager at Cargill, mentioned that owners of big capesizes were asking for $60,000 per day on trips out of the Atlantic to the Pacific. Against the backdrop of the capesize composite, which reflects backhaul hires, as well stood over $30,000 per day, and turnover in the FFA realm being the highest in five years speakers provided an excellent overview of where the markets stand.

The requisite lawyer and accounting presentations on Dodd Frank, and its European and Asian equivalents, were sobering, in contrast to the heady ship charter talk. The good news, conveyed by one non-lawyer speaker, Martin Vera, from Freight Investor Services,  a leading broker in the space, is that many of the “paper” freight transactions are actually hedging transactions- subject to a much lower degree of regulatory scrutiny than purely financial transactions.

The lawyers and compliance experts tend to err on the side of caution, and they did a good job planting seeds of doubt regarding the treatment of commodity swaps in iron ore, for example, which have grown to annual notional equivalents of circa 300m tonnes per annum with big Chinese market participation.

Drybulk panelists urged caution, with Cargill’s Beney expressing concern about the large “hidden fleet supply” that could suddenly come into play if all the vessels now slow-steaming were to move up to full speed. His co-panelist, Peter Sandler, from an investment arm of Louis Dreyfus Corporation, noted that Q1 2014 trades in “paper” FFAs are sharply discounted compared to the raging spot market.

The most interesting discussion concerned tanker prospects- amidst changing trade patterns in the tanker markets, led by analysts: Ben Nolan from Steifel, Urs Dur from Clarksons Capital and Michael Webber from Wells Fargo, all following up excellent fuel market overviews from Charles Davies of World Fuels Corp and Nick Tavlarios of Aegean Marine Petroleum Network). Phillips66’s Mike Reardon emerged from the oil major’s chartering desk to provide expert insights as he moderated the panel of fuel experts.

A central question concerns the potential for exports of US crude oil, currently prohibited even though U.S. production has moved sharply upward. The analyst trio endorsed an idea offered by Heidmar’s Per Heilmann, that maybe “light” crudes, characteristic of Bakken and Eagle Ford shale oils, could be exported in return for contracted supplies of “heavy” crude - the stuff that U.S. refineries have been running on. The analysts also were bullish on LNG shipping-with the caveat that many new projects, including US exports, would not come on stream until 2017- 2018.