· Dry Bulk Spot Rate Volatility Points to Ongoing Positional Imbalances Amidst Solid Volumes – After bottoming in the high-teens, the Capesize Spot Index posted a solid recovery, pushing freight rates back towards the high-20,000 level, in line with where the futures market has been trading for weeks now. The Atlantic market remains the most volatile area where rates managed to surge from 8,000 to 33,000 in less than a week. Such positional imbalances, combined with solid sentiment for the overall shipping sector, are the main reasons for the elevated volatility the market has observed so far this year. With solid commodity import volumes into China, there has been little concern regarding the health of the current cycle. However, one should not forget that the past has little to do with the future when it comes to cyclical industries, and given the significant imports into China, especially for iron ore, a mean reversion could very well be in the cards, if history is any guide. As we look into the summer months, a potential slowdown of iron ore trading combined with weather-related issues for bauxite exports out of West Africa could pose a risk for the robust Capesize market that futures are currently predicting. Although we remain optimistic for the duration and intensity of the current upcycle, we also are well aware of the brutal corrections that are part of the nature of dry bulk shipping and could lead to significant drawdowns (see last two years) irrespective of the longer-term underlying fundamentals.
· Iron Ore Imports to China Continue to Surge Despite Declining Steel Production – The mismatch between steel fundamentals and iron ore imports continue to dominate China’s steel complex, with year-to-date iron ore imports up some 7%, way above steel production that hovers just below the unchanged level of roughly 1 billion tons per annum, a level that has remained relatively constant for more than three years in a row. The bizarre divergence has led to a surge in observable iron ore portside inventories, which, although they are below the all-time highs reached in 2018, now stand well above the 5-year average. We remain cautious on the future development of iron ore imports into China until the balance between imports and steel production is restored, and we anticipate a slower pace of iron trading during the second half of the year. Iron ore prices, which have been supported above the $100/ton level, are now some 10% below last year, while when compared to the impressive rally in other industrial-related commodities (Copper, Silver, Aluminum, etc.), they have vastly underperformed. Slower iron ore imports into China could also pose headwinds for Capesize demand, if such a trend materializes, as the current run rate of imports is now above 1.2 billion tons per year, a rather high rate for a steel industry that remains under pressure.
· 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 as a result of a relatively low orderbook.
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