The Dry Bulk Weekly Review in Shipfix Data
Freight rates in the capesize segment have come under pressure recently as cargo order volumes remain depressed despite some signs of a tentative recovery. Shipfix’s forward-looking data sets for demand and supply in the segment offer little to suggest that the fortunes of the largest vessels will dramatically change soon, notably as cargo order volumes declined sharply last week. Still, a significant drop in market lead times across the major basins in the past week could signal an improving outlook for the largest vessels.
Tentative Recovery for Demand in the Capesize Segment Face Headwinds
The capesizes were last week’s laggards among the dry bulk segments, with the vessels’ freight index falling by more than twelve per cent. The decline, in combination with the base effect, saw the gauge moving from the top to the bottom for the year-on-year performance among the dry bulk freight indices. While still impressive, the capesize index ended last week around 50 per cent above the level recorded a year ago, but it is still a far cry from the nearly 100 per cent seen recently.
Since the beginning of July, the Baltic Exchange’s capesize index has only advanced during five sessions, while the other fifteen have ended in the red. The recent downward trend has translated into a monthly decline of more than 24 per cent for the capesize gauge, which ended last week at a two-momth low.
While global spot cargo order volumes for the capesizes have been trending higher over the past few weeks amid significant volatility, last week proved to be a disappointment. Despite the recent tentative signs of a recovery, average weekly demand remains depressed compared to what was observed during the year's first half. Still, aggregate global cargo order volumes during June were six per cent higher than during the same month last year. Also, until the end of week before last, July looked set to match the volumes recorded a year ago. However, the weak cargo ordering activities during the past week look set to derail such a development.
The seasonal patterns of cargo ordering in recent years suggest that demand will pick up in the coming month. However, the timing has been somewhat fluid in the past, and the recovery is usually not a linear affair. Still, recent weeks show tentative signs of a recovery in demand, but volatility remains a constant companion.
The tonnage situation for the capesizes has been volatile over the past few weeks, with vessel availability in the Atlantic and Pacific basins spending time on both sides of the long-term average. In the Indian Ocean, it has been more stable, with supply mostly in line with normal circumstances. Still, the tendency towards higher than average tonnage supply in the Atlantic and the Pacific basins will delay any significant recovery for freight rates in the capesize segment, even if last week’s drop in demand proves to be short-lived..
Higher Demand for Coal Is Crucial for a Capesize Recovery
As the capesize trade is focused on a limited number of cargo types, demand for seaborne transportation onboard the largest vessels can be volatile as the appetite for those commodities shifts. Coal is among the commodities regularly transported on the capesizes and, as a result, the fortunes of this trade will affect freight rates. While coal prices have recovered somewhat during the second half of July, they remain depressed compared to the levels seen during much of April and May. The lower prices reflect weaker demand in a well-supplied market. The softer demand for the dirtiest of fossil fuels has contributed to the headwinds for the capesizes.
Apart from an increase during the weeks in the middle of July, cargo order volumes for coal loading globally onto capesizes have been trending lower for much of the second quarter. On the other hand, the cargo order volumes for non-coal shipments have seen a minor rebound since the end of May, offsetting some of the weakness associated with the coal trade.
While weekly cargo order volumes for coal and other commodities have fallen below their long-term averages, coal has seen the most significant decline. Last week, global spot cargo order volumes for coal loading globally were around 35 per cent below the average for the past year and a half. At the same time, total cargo order volumes were around twenty per cent lower than the long-term average. Hence, a rebound in demand for seaborne transportation of coal is a crucial ingredient for a capesize recovery.
A Drop in Market Lead Times Indicate Improving Conditions for the Capesizes
The demand and supply situation for the capesizes offers scant hope of an imminent rebound for freight rates, especially as cargo order volumes took a nosedive last week. However, beyond cargo ordering activities and vessel availability, another measure provides some hope for the freight rates in the largest segment. A recent shift in market lead times across the major basins indicates that demand is becoming increasingly focused on tonnage for delivery in the near future, a development usually supportive of higher freight rates.
Since the middle of last week, the average time between the first circulation date of cargo orders and the first loading date has declined significantly. While the limited demand in the Indian Ocean and the Pacific will reduce the positive impact on freight rates that declining market lead times usually have, it will nevertheless weigh on the short-term tonnage supply in the two basins. On the other hand, in the Atlantic, where cargo order volumes have experienced lesser headwinds, the increasing focus on tonnage for imminent delivery should have a positive impact on freight rates. Still, should the soft demand of the past week extend into the current one, the declining market lead times are likely only to offer a limited offset.
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