Wall Street Greek: BDI Continues Rapid Increase

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Miral Shipping Freight Market Report

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BDI Continues Rapid Increase

In the past week, there have been astounding increases in the drybulk freight market. So far, these increases have been greatly skewed towards the Capesize segment (ships over 100,000 tons deadweight); though panamaxes (60-80,000 tons deadweight) are also showing large increases. Supramaxes and smaller vessels have not yet participated much in this rally. The Baltic Freight Index (BDI) currently stands at 4291, while the Capesize, Panamax and Supramax indexes are at 8147, 3505, 1862, respectively. Most often, in market rallies the larger ships lead on the way up, but during market corrections they also lead on the way down.

The big story is the incredible increase in the Capesize vessel rates during the past ten days, where the timecharter average has almost doubled. They increased 16% on June 2nd, alone! The cause has been mainly due to increased iron ore demand from China, and with it, now considerable port congestion in the iron ore loading areas of Brazil and Australia, and also the discharge ports in China. Port congestion takes ships off the market, and its effect usually causes an amplification of the upward pressure on freight rates.

The next strong resistance level for Capes is at about $115,000 per day 4 TC average; for panamaxes around $38,000 per day; and supramaxes $32,000 per day. For the overall BDI, the next resistance level is approximately 4700. The rate of market ascent makes it appear that these levels might be reached within the next week, though there are some reasons to be more cautious.

Going forward there are certain key issues to keep in mind. The differential between capesize and other vessel classes are now historically wide. For example, average capesize rates are now more than 3 times those of panamaxes. A key reason behind this seems to be due to iron ore trade's role as the chief driver of this rally, compared to demand for most other commodities, which have increased significantly less. When differentials become so wide, there is the potential for significant narrowing. The question is in which direction... It appears now that iron ore demand will require the use of smaller vessels, therefore, one can expect these rates to increase further. We also have to wait and see where the capesize market levels off, and measure its sustainability before the amount of increase in the smaller vessels becomes clear. Also, the grain and coal trades must be watched. Further demand for these commodities can drive up the rates for the smaller vessels quickly.

Chinese authorities may turn off the switch

Due to the large quantities of cargoes destined for China that were reportedly purchased purely on speculation, there is a strong possibility of the Chinese government stepping in and canceling or curtailing future shipments. This has happened before and when it does happen, freight rates can plunge as fast as they went up. Will there be such action by the Chinese authorities? How high does the market go before any such action? Nobody knows outside the Chinese government.

The weaker dollar certainly plays a role. The periods of the highest freight rates have generally coincided with periods of a lower dollar. This time is no different, and indicates how global government policies can affect dry bulk shipping. In this case, stimulus spending in China is clearly affecting the demand for freight. A large flood of liquidity seems to be fueling speculation in commodity markets, much as it did during 2008. These trends look set to continue for the foreseeable future and are positive for shipping as long as they last.

Finally, the predicted oversupply of vessels (particularly capsizes) has not yet materialized, with the deliveries of most new vessels reportedly delayed. This is also positive for freight rates in the near-term.

However, the most significant factor right now is the strong demand for iron ore in China. Resistance levels at about 30% above today's freight levels for capesizes, and approximately 50% for panamaxes and smaller vessels, should be strong. We will further advise important developments when they occur.