Dry Bulk FFA Market – Taking a breather


by Titus Zheng, FIS

Freight market seems to a break at the present moment after last week rally supported by the good iron ore and coking coal demand in China. Likewise, as the demand for both commodity retreated this week, the Baltic Dry Index (BDI) also followed suit and dropped by 24 points day-on-day to 847 points on Wednesday, 5 Jul 2017.

“The 2nd half of the year started pretty much as the first half finished,” commented a FIS Freight Forward Agreement (FFA) broker on the Capesize market.

His bearish market outlook was weighed in by the Capesize physical trading mire in both basins where the Capesize 5 Time Charter average (5TC) was slashed by almost 6% at the start of the week, on 3 Jul 2017.

“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 has dropped by $789 day-on-day to $7,264 on Wednesday 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 FFA broker.

The contraction can be attributed to the waning Chinese buying demand on seaborne iron ore cargoes as buyers mostly took a breather following the recent uptick in prices. Besides, 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 authority. 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 smog in cities.

Thus, the mills have reacted beforehand and operated in full capacity earlier on to stock up steel inventory ahead of the environmental curb.

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

“Last week positive close seemed to filter through this morning on Panamax paper with a flurry of early buying on prompt contracts seeing July and Q3 trading up to $9,200 and $9,000 respectively.” said a FIS FFA broker on the Monday market.

“However, this was relatively short lived and sellers returned nudging us back down to the mornings opening levels leaving us flat on the day.” he later observed.

Thus, Panamax rates lost $183 day-on-day to record $8,563 on Monday and by the end of Wednesday, the freight rates had remained largely flat with loss of $67 to settle at $8,496.

Meanwhile, the downward movement continued with Supramax rates which recorded $8,061 at 5 July 2017, down $88 as compared to $8,149 settled on Monday.

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 days.

It might seem unlikely for freight rates to surge up again, where buying demand of iron ore appeared to dry out 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 still enjoyed good steel margins currently which allows them to snap up the high grade ore in the seaborne market as compared to buying from the Chinese docksides that were piled up mainly by lower grade ores. Besides, 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 energize freight rates in near term.