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Chart 1: High-frequency indicators for C5TCs — Laden and
ballast spread in Brazilian routes — started to rebound and
indicated freight rates will increase in the coming weeks with the
recovery of laden shipments against limited ballasters
Over the past few weeks, the C5TC spot rates had continued to
decline and fell below $20,000/day in the week starting 7 June from
more than $40,000/day a month ago with several operational issues
from Atlantic mineral exporters, the falling steel-related
commodity prices, and negative sentiments with news of attempts by
the mainland Chinese governments to limit the rising commodity
prices.
However, as we discussed in the Freight Rate Forecast Service
Research note, the bigger size sector has clear upside potential in
the coming months based on fundamental assessment. In the June 2021
update (released 3 June 2021), Capesize monthly statistical models
forecast C5TC spot rates to increase more than 50% ($10,000/day)
higher than the current spot rates ($20,000/day as of writing) in
the coming months based on demand and supply fundamental
assessments.
Moreover, since freight rates have been more affected by
sentiments and commodity prices in recent period, once commodity
prices stop declining, there will be likely recovery in the dry
bulk freight rates. Specifically, as long as iron ore prices remain
high, there is possibility of another short-term spike in Capesize
freight market; even though 62% Fe iron ore prices have declined,
high-quality 65% Fe iron ore prices, mostly from Brazil, have
maintained its value with strong demand from mainland China, trying
to reduce emissions with high quality ore and limited capacity.
Therefore, we believe that high quality iron ore exports from
Brazil and its Capesize shipments are expected to increase in the
third quarter this year.
Our weekly forecast models supported our view that although
Capesize freight rates have declined over the past few weeks with
the correction in commodity prices, models still signaled a strong
rebound in the coming months (see Appendix 1). Interestingly, one
of the high-case models indicated July 2021 C5TC spot rates could
go up to $60,000/day and we will not be surprised to see those
upside scenario if FFA July contract breaches initial resistance
level of about $40,000/day and triggers short-covering.
Specifically, high-frequency indicators for regional Capesize
demand and supply balance from IHS Markit's Commodities at Sea
— Laden and ballast spread in Brazilian routes — started to
rebound and indicated freight will increase in the coming weeks
with the recovery of laden shipments against limited
ballasters.
Also, it is worth noting that the current dry bulk freight
market has been supported by several new factors mainly driven by
COVID-19 environments, other than mere seasonal S&D balance.
The most notable factor is the strong container trade demand and
record high container freight rates along with inefficiency of
supply chain including congestion. IHS Markit Supramax forecast
models recently picked global container freight rates as one of the
major drivers (8.2% contribution in the S10TC forecast, June 2021
update) and the container freight rates mostly affected Pacific and
backhaul routes, which explained why there has been unusual
difference between Pacific and Atlantic rates and also between
Fronthaul and backhaul freight rates.
In this context, we maintain our medium and long-term cautiously
bearish view as we believe the recent spike was a temporary
cyclical recovery driven by the pandemic — with a strong
short-term spike in the third quarter — instead of a long-term
uptrend super cycle. With the assumption that the disruptions in
the supply chains will be resolved once the pandemic recedes around
the summer season, better balances are expected to develop in the
markets with cost pressures dissipating.
Specifically, IHS Markit economists believe service-sector
consumption likely regains its pre-pandemic level later this year
or early next year as vaccination rollouts progress. Therefore, we
assume container freight rates would face correction around that
period and will affect geared bulkers market as well.
Finally, while it is important, it would be short-sighted to
focus solely on the micro fundamentals of the dry bulk freight
market. There clearly are some bullish/bearish fundamentals in dry
bulk supply/demand balance, but the overall finance and commodity
environment, and most importantly sentiments will be the major
drivers for volatilities in the dry bulk freight rates.