· Its Always Darkest Before the Dawn: Capesize Rates Should Find a Bottom in the Next Two Weeks – Although we are still in the midst of a summer slowdown for dry bulk shipping, we anticipate a gradual bottoming and turnaround in spot rates prior to the end of August. Such a forecast is supported by several factors, although the recent global turmoil in the financial markets has suddenly introduced another risk factor to our forecast that presently seems hard to ignore. Seasonality supports a recovery in dry bulk rates as we approach September, especially when we look to the pre-Covid era. Firstly, the rainy season in West Africa is about to peak and soon charterers will begin to book vessels for mid/end of September bauxite loadings, when the weather will be significantly drier than it currently is. Furthermore, the fourth quarter rump up in Brazilian iron ore exports is ahead of us and given Vale’s recent updated production guidance, we anticipate increased volumes to be shipped during the final stretch of the year. Finally, coal should also begin to move in higher quantities as utilities begin to build some inventories ahead of the high-demand winter season. Of course, all the above is currently facing a major headwind coming from multi-year high iron ore inventories in China, a continuing slump in Chinese real estate construction, and the newly introduced global financial market instability. The uncorrelated nature of shipping makes dry bulk investments particularly attractive during such periods and we believe another such trading opportunity is about to present itself in the next few weeks.
· Iron Ore Prices Stabilize, but Fundamentals Remain Uncooperative – The iron ore market continues to be under pressure as supply of the steelmaking material is ample while demand is subdued due to the ongoing slump in the Chinese real estate sector. Some recent positive signs of fiscal support from the Chinese policymakers have resurfaced, but the size and impact of such measures are still debatable. With Chinese portside inventories remaining above 150m tons, a historically high level, we see little urgency by steelmills to chase iron ore cargoes, despite the fact that iron ore production so far this year has been robust. The recent financial turmoil that has rapidly spread around the globe, has also introduced another volatile element, with FX prices swinging wildly, impacting the price of all major commodities and adding another risk element to commodity traders’ purchasing decisions. After all, any indication of tighter credit conditions for the developed world might reduce the incremental ex-China demand for bulk commodities, even if China remains steady in terms of bulk imports. Overall, we anticipate iron ore prices to soon drop into double digit territory and remain rangebound for the remainder of the year, defenseless against the significant overstocking activity that has taken place over the last 10 months
· 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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