Breakwave Bi-Weekly Dry Bulk Report - October 1, 2024

· Capesize Rates Continue to Climb on the Back of Favorable Seasonality – Although volatility remains subdued across the dry bulk sector, Capesize rates continue to show decent upside momentum, while we sense an air of optimism characteristic of periods preceding major rallies. At about 30,000, Capesize spot rates have clearly outperformed the smaller sizes, as cargo flow for the large bulkers remains remarkably strong. With the North Atlantic spot market finally catching up to the rest of the basins in terms of rates and with winter weather upon us, we see the risk/reward for such vessels balanced, despite the ongoing lag in associated demand for the sub-Cape sector. The Atlantic market is capable for substantial volatility during the fourth quarter, and any spike in rates will most likely be initiated from that part of the world. On the other hand, Panamax rates appear relatively cheap and the potential for cargo splits (i.e. instead of hiring a Capesize vessel, one can split the cargo into two Panamaxes) could provide some support but also limit any Capesize upside. Furthermore, the overall commodity space received a significant psychological boost from the recent Chinese stimulus announcements, although we see little direct impact on trade volumes for dry bulk shipping. Finally, Capesize owners are currently enjoying quite a profitable market with limited volatility, but the risk-reward from a trading perspective is not as favorable as in past years: First quarter futures are now priced at 18,000, which is well above historical averages (with the exception of last year) and although such an average is achievable, a lot of things need to happen in order for such strong rates to materialize during a typically weak quarter.

· Chinese Stimulus Tsunami Raises All Boats but Details Always Matter – The psychological impact of mostly expected monetary changes from the PBOC led to a major rally in Chinese-related assets over the past week. Most of the announcements were generally expected (RRR cut, MLF reduction, mortgage downpayment relief) but some new additions (support for the stock market, direct checks for needing households) combined with a forceful presentation led to a major shift in psychology, causing a sizable amount of short covering but also some optimism for the future. Iron ore prices that have been particularly sluggish all year long, jumped almost 20% in days reflecting such renewed optimism. Yet, once we look at the details, we think such positivity is premature. The Politburo stated their preference for limiting new construction in order to help housing prices recover. Such a policy is clearly not positive for iron ore that relies on strong demand for steel, something that is directly linked to construction activity. We believe that once the dust settles, iron ore prices will resume their decline, especially given the very high inventory levels for this time of the year but also the persistent negative margins that continue to constrain steel mill profitability.

· Our Long-term View – The last few years have been characterized by increased geopolitical uncertainty. Going forward, we expect such events to continue to affect global trade and have a meaningful impact on effective vessel supply. Combined with the potential for a multi-year cyclical rebound in China’s economic activity following the recent economic turmoil, dry bulk shipping should experience higher volatility on top of a secular tightness driven by increasing bulk commodity demand and a slower fleet growth owing to a relatively low orderbook.

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