· Capesize Spot Rates Move Higher as Seasonality Kicks In – As we previously discussed, mid-August proved to be the turnaround point for Capesize spot rates. Led by the Pacific market, spot rates for the large bulk carriers have steadily moved higher, now approaching the 30,000-mark, as both majors and operators have begun to book vessels for late September dates. Futures have anticipated much of the recent strengthening, however there was some room for further improvement with the curve now solidly pricing ~30,000 for the rest of the year. Is such a spot rate average attenable? On the one hand, the Capesize market has shown exceptional resiliency so far this year, something that is not shared by the midsize Panamax spot segment that is hovering at year-lows. In our view, it has been more of a psychological support that is holding Capesizes higher rather than underlying fundamentals, but the reality is that we are about to enter the fourth quarter starting from a very strong base and thus the upside potential is indeed there. On the other hand, fundamentalsfor the key iron ore market are the worst they have been in many years. It is difficult to see how iron ore imports into China can sustain, let alone improve on, the recent rate, when inventories are hovering at record highs for this time of the year and there is not much of a positive economic outlook in the near term. Short term fluctuationsin shipping rates are extremely hard to predict, which means the next few months could indeed prove stronger than what fundamentals point to, but at this stage a stronger market will be the surprise while any weakness could easily be explained by a rather fragile market balance.
· Iron Ore Bounces Back Towards $100/t, but Fundamentals Cap Further Upside – A “dead-cat-bounce” in iron ore was to be expected given the broader bearishness and coverage that the specific industry has recently been enjoying. After topping $100/ton once again, the recent economic data out of China combined with record-high inventory levels for this time of year have once again weighed on prices, which currently stand in the mid-$90/t range. Unfortunately, there is no easy way out of the current slump, and only price can lead to a rebalancing of the market. The precise level needed for such a rebalancing is difficult to predict, but we suspect it is somewhere between $75-$90 per ton, where the pain for the higher cost producers is severe enough to lead to production cuts. However, it is not so much the price that matters but the duration of any decline, as average prices so far this year remain deep into profitable territory. Activity in the iron ore market needs to slow down, inventories to decline, and a level of profitability in the ailing Chinese steel industry needs to be restored before a cyclical upturn can develop. All the above are presently moving in the opposite direction, and thus, the global iron ore market continues to dig deeper into oversupply.
· 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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