The Dry Bulk Weekly Review in Shipfix Data
The capesizes enjoyed a good month in May, with their freight index gaining more than 34 per cent. While the first week of June delivered further gains, the short-term outlook looks increasingly challenging. Shipfix’s forward-looking data sets also paint a mixed picture. Still, recent declines in market lead times and tonnage supply could offset concerns over demand, providing limited support for freight rates in the segment.
Supply Rather Than Demand Is Likely to Support Capesize Freight Rates
The Baltic Exchange’s index for the capesizes has outperformed the gauges for the smaller segments during May. The sub-index for the largest vessels gained around 34 per cent during the past month amid changeable conditions. The first week of the new month has seen additional gains, albeit to a lesser extent.
The past few weeks have seen volatile cargo order volumes for the capesizes in the spot market. However, developments have not been out of the ordinary for the segment, which generally endures variable conditions given the nature of the trade. The week before last saw robust demand in the Atlantic and Pacific basins, with cargo order volumes growing significantly compared to the preceding week.
However, despite relatively solid readings at the end of May, with volumes in the Atlantic broadly in line with the average for the past five months, the first week of June saw demand weakening. On the other hand, demand in the Pacific has been more robust over the past fortnight, with the end of May seeing cargo order volumes at nearly twice the average for the year to date. The solid end for May offset earlier weakness in the two basins and brought total cargo order volumes for the month somewhat above last year’s levels.
In contrast to the Atlantic and Pacific basins, demand in the Indian Ocean was subdued during the second half of May. The aggregate cargo order volumes for May fell by eight per cent compared to last year. While the past week saw a rebound in the basin, the recovery only saw cargo order volumes returning to the levels seen a year earlier.
The robust data during the final week of May pointed towards continued strength for the capesizes in the Pacific and Atlantic basins. However, the past week’s data were less bullish, suggesting that demand may face some headwinds, at least in the short term. In addition, the next few weeks will likely be affected by some seasonal weakness. Still, with tonnage supply under some pressure, current demand levels should continue to support freight rates, although nothing spectacular should be expected.
A Decline in Market Lead Times Could Lend Some Support to the Freight Rates
As highlighted above, the current demand and supply situation for the capesizes suggests that the short-term outlook for the largest segment is mildly positive. Relatively robust weekly cargo order volumes and a tonnage supply under pressure indicate that the Baltic Exchange’s capesize index could continue to move higher. Still, based solely on demand and supply, any upside appears limited.
In late May, there was a significant drop in market lead times, signalling a shift in demand towards more imminent deliveries. However, the early stages of last week saw a reversal of the development, with market lead times rising sharply across all basins. However, as the week came to an end, a partial reversal was underway.
Hence, beyond demand and supply, declining market lead times indicate that capesize freight rates may continue to find some support in the short term. Still, the market lead times are retreating from relatively high levels, and the volatile nature of the indicator suggests that support for freight rates may prove transient.
Weaker Demand from the Coal Trade Adds to the Headwinds for the Capesizes
Over the past week, rising Chinese domestic production of coal has weighed on demand for seaborne imports of the commodity and contributed to prices moving sharply lower over the past week. The Newcastle futures for delivery next month ended last week at the lowest level since the beginning of April, following a decline of almost eight per cent. Current price levels are also a few per cent below the readings seen a year ago. In addition to higher Chinese coal output, lower European natural gas prices also contributed to a reduced appetite for the dirtiest of fossil fuels.
Last week, global aggregate spot cargo order volumes for coal to be shipped onboard capesizes came under pressure. The decline in demand from the coal trade contributed to total spot cargo order volumes for the largest segment declining somewhat after a strong rebound during the preceding week. While declining Chinese demand did not account for all of last week’s weakness, it nevertheless made up for a large portion of the decline. Hence, should Chinese coal production remain robust in the coming months, the development could cause some headwinds for the capesize freight rates.
The short-term outlook for the capesizes looks somewhat challenging, with several factors providing contradicting signals. Still, while demand may face some seasonal headwinds, downward pressure on vessel availability and market lead times could provide an offset and support limited gains for freight rates.
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