The Baltic Dry Index (BDI) measures the average spot rates for dry bulk freightwith a sector weighting of 40% Capesize, 30% Panamaxand 30% Supramax
The Breakwave Dry Futures Index (BDRYFF) is designed to trackfreight futures contracts with a sector weighting of 50% Capesize, 40% Panamax and 10% Supramax and a weighted average maturity of approximately 50-70 days. www.drybulkETF.comBreakwave Dry Futures Index:1,029Baltic Dry Index (spot): 1,374Short-term Indicators:
↑30D: 9.8%↑30D: 14.8%Momentum:Positive↓YTD: 0.0%↑YTD: 0.6%Sentiment:Neutral↓YOY: -3.1%↑YOY: 26.1%Fundamentals:PositiveBi-Weekly Reportw
The dry bulk market welcomes 2021 with a bang as futures adjust to reality
As we stressedout prior to the Christmas break, the cautiousness of the markettowards JanuaryCapesize rates was not warranted, as the Atlantic basinwaslacking tonnage while the Pacific market continues to experience strong demand due torecord-high iron ore prices.Whilefutureswerelooking backwards to last year forguidance (odd, butfrequentlythis is the case with freight futures),market participants became increasinglycomplacent with the steep discounts of prompt futures to spot, which eventually resultedin yesterdays’sharpandviolent upward adjustment that pushedthe futures market closer to spot, albeit still at a discount.
With both the Pacific and Atlantic roundtrip rates paying closeto 20,000, it is Capesize rates from Brazil to China thatstill keepthe index relatively low, and any adjustment towards the above conference rates could potentially lead to one of the best January months for Capesizes in a decade.
This is a big win for a market that over the past few years has seen rates dropping to the low single digits fast, although one should always keep in mind that weather plays a significant role in first quarter dry bulk rates, and any intensificationonrains in Brazil or the potential for cyclonesdeveloping in Australia could easily bring this market down to the single digitsrapidly.
For now,however, the market enjoysa countercyclical strength witha decentchanceof developing further and pushingthe Capesizeaverageinto the 20,000 range. Panamax rates also enteredthe year quite strong, which makes the case for a well-supported Capesize market even stronge
Volatile iron ore prices meanincreased scrutiny by China
During the Christmas break,a number of news articles and announcements that came out pointedto the frustration and concern of the Chinese steel industry towards the record high iron ore prices and the very negative impact on the sector’s profitability that such a development brings.
As the largest iron ore consumer in the world, China has the ability to alter the global iron ore trade dynamics meaningfully, although we believe any such development will be a multi-year process rather than anabrupt event. Over time, China clearly wants to diversify its iron ore supplies away from Australia and into areas like West Africa, Russia,and Brazil.
In addition, China wants to obtain more direct control over the iron ore supplies, which bodes well with their long-term existing investments in areas like the Simandou deposits in Guinea. Ultimately, such a diversification will increase tonne-miles,as the distances involved are longer, a clear positive for dry bulk shipping.
Volatility in freight should increase
We expect spot rate volatility to increase this year, as demand and supply growth rates seem closer than any other period in recent history (with a high probability of a significant gap towards a tighter market).
A lot comes down to Brazil and the potential for sizable iron ore export growth this year, while iron ore price volatility will also play a bigger-than-usual rolein determining freight rates. Finally, coal prices and the trade dispute between China and Australia haveshifted the markettowardslonger-haultrades, which combined with an anticipated global commodity recovery, could provide further support to dry bulk shipping