Capesize Values Drag but Earnings Set to Rebound

Dry bulk asset values dropped sharply in November and have reached 16-year lows, partly driven by very weak sentiment over the near-term future for vessel earnings, according to the latest Dry Bulk Freight Forecaster from shipping research and consultancy firm Maritime Strategies International (MSI).

 

However, despite a bearish forward view of dry bulk fundamentals, MSI is more positive than the freight futures market’s forward curve for Capesize and Supramax spot rates in Q2 next year.

 

MSI predicts a closing of the gap between iron ore spot and futures prices over the next six months, driving a period of iron ore restocking in China during Q2 which will support the Capesize market; meanwhile a strong increase in Latin American grains shipments will provide a boost for Supramax tonne-mile demand.

 

The November average daily spot rate for a 170,000 dwt Cape was $5,700. MSI predicts a fall to $4,200 in Feb 16 before earnings climb to $9,700 by May 16. This is almost double the Q2 2016 FFA contract for the 4TC index at $5,190 (as of publication date December 10).

 

Will Fray, Senior Analyst at MSI said, “Whilst we are undoubtedly bearish about the state of the market, we believe that the FFA forward curve is too pessimistic for Q2 next year, primarily for Capesize and Supramax vessels. However, what improvement we see there must be set against our six-month outlook for Panamax market fundamentals which remain unquestionably weak.”

 

This view is partly derived from expectations that new Ultramax vessels will continue to take market share from Panamax tonnage - particularly long-haul grains trade from Latin America.

 

Panamax vessels will struggle to compete and freight rates will be the lowest of all benchmarks in May at under $6,000/day.