Another day of higher dry bulk rates, with Capesize spot levels reaching the highest point for any given July in the last 10 years as both basins see tight vessel availability and strong demand for ships. On the Atlantic front, that has been suffering from cargo flow for most of the year, Brazilian iron ore export volumes have been plentiful and thus demand for ships to transport such cargoes has increased considerably. As a result, more vessels are steaming towards the Atlantic but now such trend is causing a tighter market in the Pacific, thus pushing Australia-China rates higher in the process.
The end result is a global rally in rates for the large Capesize ships that is also improving sentiment (at the moment though only sentiment) for all dry bulk vessels. By the end of the trading day, rumored Capesize deals where concluded at levels that are up more than 6,000/day versus the index on some routes, so look for another up index tomorrow, all else being equal.
Highest spot Capesize index in 10 years for this time of the year
Still, freight futures remain skeptical for, well, the future. Although today futures rallied again as spot prices increased, on Capesizes, futures are trading at steep discounts to spot and continue to play a “catch up” game similar to last week. Such skepticism is understandable. After all, over the past decade, every spike was followed by a steep correction, and it is very difficult to argue that this time will be different. Such discounts though provide quite a bit of comfort to traders and investors alike, as history is the only guide for most market participants when freight rate volatility increases in such a dramatic way. Smaller size vessels are not as fortunate at the moment, and although the Capesize momentum is aiding sentiment, rates remain relatively low for Panamax/Supramax ships while futures prices are trading at steep premiums to spot.
As the Capesize index is approaching 30,000 (maybe even by tomorrow?) it is important to put the increase into perspective. Iron ore miners in both Australia and Brazil, even at current freight prices, are earning more than what they have earned at any time in the last nine months. Iron ore prices are hovering around $100/ton and the increase in freight costs only partly offsets the increase in selling prices. Actually, miners are currently earning the highest net-of-freight price in many years with the exception of a brief period last year following the dam tragedy in Brazil (for Australia, the price trend is similar, only the net selling price is even higher).
With both miners and ship-owners happy(er), it is the end consumer (i.e. mainly steel mills in China) that is paying the steeper price. However, with the global stimulus now exceeding $18 Trillion (~20% of global GDP), there is tremendous amount of liquidity around flowing into the economies while infrastructure plans and spending are increasing at a rapid pace across the globe.
The current environment bears a lot of similarities to 2008-2009 following the GFC, when China unveiled a $586 billion stimulus program that pushed the Baltic Dry Index to 4,000+ in a matter of months. Although there are a lot of differences between that era and now (most important one is vessel supply) the staggering difference is in the size of the amounts involved and the willingness of governments to spend in order to recover economic growth. Throughout history, shipping has always been a levered play on global economic growth and one should not dismiss the significant force of freight rates once a demand/supply imbalance is created due to external forces, i.e governments.