Despite the positive sentiment coming back in the dry bulk market, as shown by the latest rise in the Baltic Dry Index, the industry’s benchmark, shipbrokers and analysts remain cautious. In its latest weekly report, shipbroker Allied Shipbroking said that “being almost at the end of the summer period, has the dry bulk sector recovery shown us all its glitter so far? A tricky question, even trickier however may well be the answer. We witnessed the collapse of the market at the early part of the year, underlying emphatically the “hidden” risks involved, even when most other “known” indicators suggest holding a long position. Of course, the prolonged improving market fundamentals came forward and shook up a recovery in an even more emphatic way. However, seeing the downward correction at the latest part of the previous month, few would expect August to be closing in on a BDI average of around 1,911bp”.
According to Allied’s Thomas Chasapis, Research Analyst, “nevertheless, it is difficult to evaluate whether the current state is a mere reflection of the market trying to rebalance itself, or as a result of an “amassed” buying spree. Certainly, we must wait to see if the market will be “on time” to the overall catch-up attitude of late and succeed the overall returns attuned with those of the last couple of years (on average). On the other hand, with year-to-date volatility being in almost double figures this year, how truthful is a mere average figure when describing the actual market that we experienced this year? Let’s start with the positive side. We witnessed a considerable boost on a m-o-m basis in FFA contracts for all main segments for contracts not exceeding an end date beyond this year. Given the rather surprisingly “good” freight market noted during August, the upward correction can be seen as nothing less than logical. However, the interesting part isn’t the actual quoted levels, but the underlining trends behind these”.
Chasapis added that “as we move forward and look at contracts with more distant end dates, we notice a rather significant “discount” in the closing numbers. Some could point out that this is as part of the increased uncertainty and perceived risk. Apart from those, where is the typical seasonality effect of a “firm” final quarter, or the theoretical, as it seems so far, bullish sentiment being built as of late? If this bearish attitude isn’t evident, let’s have a look again at what similar contracts were doing during the same time frame last year, where the freight market was in an overall upward mode as well. At that point the trajectory of forward contracts was upward, indicating a market that was still improving (or at least showing potential)”.
“Yet beyond all this how do we explain the y-o-y discount in long-term FFA contracts? The current perplexed “feeling” would justify a softening for the next year or so, but how would we explain the y-o-y decrease of 2,000 US$/day or so on average for forward annual FFA contracts in the BCI – 5TC in a more macroeconomic perspective. The reversal noted this year in iron ore seaborne trade growth has influenced this a fair bit but given the discount noted in similar FFA contracts for the BPI – TCA index, it looks as though the dry bulk sector as a whole has becomes an ever more puzzling scene with regards to its future. All-in-all, the current situation of the market seems rather bizarre, with much of a noise in-between, amidst an overall complex scene. Year-to-date the positive skewness observed in the BDI’s distribution seems to have created a false impression that due to these periodical extreme positive rallies, we are on an upward trajectory path, whereas the reality may well be that the market is now stuck in a state of limbo. It will likely be difficult for us to see moving forward, such an accumulated appetite for cargoes emerging in such a narrow time span, as was noted this summer, to be able to constantly pull us out of similar market dips in the future”, Allied’s analyst concluded.