Dry Bulk FFA market takes a summer breather

The freight market seems to be on a break at the present after last week’s rally supported by better iron ore and coking coal demand in China. Likewise, as the demand for both commodities retreated this week, the Baltic Dry Index (BDI) followed suit and dropped by 24 points day-on-day to 847 points on Wednesday.

“The second half of the year started pretty much as the first half finished,” said an Capesize FFA broker. His bearish market outlook was informed by Capesize physical trading in the mire in both basins, with the Five-TC average slashed by almost 6% at the start of the week.

“The paper market was similarly under pressure and was sold off aggressively on Monday, although losses were limited to the balance of the year contracts.” he added.

By Wednesday, the 5TC had dropped by $789 day-on-day to $7,264 and down by 13.4% as compared to its starting rates of $8,393 on Monday. “To say that a bearish tone has been set for the week would be an understatement.” concluded the broker.

Whatever the technical or fundamental analysis, in every way and from every angle, the Cape market looks ugly – there were few positives to be taken from week’s end.

The contraction can be attributed to waning Chinese buying demand for seaborne iron ore cargoes as buyers mostly took a breather following the recent uptick in prices. In addition, it was heard that many mills in China have completed their restocking in the past week after a flurry of purchases.

This Chinese restocking of iron ore might be preparation for an upcoming environmental output curb issued by the Chinese authorities. It is estimated that steel industry in Hebei, Henan, Shanxi and Shandong will reduce their output by 50% under the direction of the country’s environmental protection authority to reduce pollution.

Thus, the mills have been proactive in operating at full capacity to stock up on inventory ahead of the environmental curb.

With Capesizes setting the tone for the slide, strong Panamax rates also crumbled under the pressure as previous gains appeared to slip up at the start of the week.

Last week’s positive close seemed to filter through on Panamax paper but this was relatively short-lived and sellers returned nudging us back down to the opening levels. Thursday was a slightly more active day trading within the top end of the current range with buyers present and willing last done.

With more enquiry evident in both basins and the index finally back into positive territory was saw good support developing on July and Q3 at $9000 with the overall tone a little more optimistic.

Supramax rates looked to be heading south, having opened the week at $8,149 and falling to $8,061 by Wednesday. By Thursday prompt had pushed to $8600 on July and $8850 August – but the rest of the curve remained unchanged as we lacked activity throughout.

Handysize rate went rather flat throughout the week, with starting rate of $6,846 on Monday before ending at $6,864 on Wednesday, booking a gain of $18 in span of three days.

At moment – with demand for iron ore appearing to dry out – it seems unlikely that freight rates will surge upwards for the moment. Moreover, most analysts will point to the huge stockpiles in Chinese ports as market fundamentals for a bearish outlook.

However, the Chinese mills are still enjoying good margins currently which allows them to snap up high grade ore in the seaborne market rather than buy from the ports which are piled up with lower grade ores.

In addition, the imminent steel output cut in Chinese provinces may further drive steel prices forward in Q3, thus reviving the seasonal lull in dry bulk and energizing freight rates in near term.