I think I am a bit punch drunk from the various slings and arrows of outrageous fortune that have been raining down on me in a very fast-moving sale and purchase market, but that is what I am here for. To be a broker or not to be a broker. I see it philosophically: if you’re being kicked, at least you can say you are on the pitch and competing. So trying to find some lighter relief at the end of the week, I am having fun reading about iron ore in general, and iron ore shipments, iron ore prices, and capesize freight rates in particular. Mixed messages – as well as metaphors – abound, and as I am not involved daily in that market, I am not as well informed, or let’s say emotionally engaged, as I would be in supramaxes or handysizes. But it is instructive.

 

I like Dr Roar Adland, an intelligent commentator on the dry bulk market, and no wonder, because as an FFA trader in a former life, he too has experienced the market, and had some skin in the game. He is now doing, and supervising, some very interesting research as shipping professor at the Norwegian School of Economics, no doubt academically working through some of the problems he faced when sitting at the trading desk. It is refreshing to see this, as most academic research is carried out by professional academics with little understanding of the actual processes that lead to – to use a phrase that I very much like and will be using again – price discovery. I think that this is one of the reasons why I enjoyed so much this comment on his LinkedIn page:

 

If the high iron ore prices in May were supposedly bullish for the drybulk freight market, is their $100/tonne drop now a bearish sign?

The absolute level of commodity prices actually has no long-term bearing on freight rates. In shipping we care only about volumes exported. If prices were high in May because demand was high and supply constrained, then this need not be better for the freight market than the case where supply increases and iron ore prices fall…..

….So, the next time you hear someone using the level of commodity prices as an argument for whether freight rates should go up or down – ignore them.

 

I like it because I agree with it, and I have been saying much the same think for a long time. But this statement, true though it is, is difficult for many other commentators to accept, I suspect because other commentators tend to need to tell a story that is easily related to what else is going on. So when my good friend Peter Sand at BIMCO says “Are we looking at the next dry bulk super cycle? Is it even a cycle?” I pay attention.

 

“Commodity prices have staged a comeback and are hovering around or above 2007 and 2008 levels. This has fuelled talk of a commodity super cycle. However, while dry bulk freight rates and ship values are currently high compared to the past 10 years, they are very far from earnings seen during 2007-2008 and there is little to suggest that they are heading that way.”

 

Well I don’t know. This report was posted on 12th August 2021 and the expected August lull – what August lull? – has not materialised. The Baltic Capesize Index has moved up from 4,608 to 5,997 in that time. That may not mean much, except in pure numbers, but the timecharter equivalent has risen from US$ 38,217 to US$ 49,731 per day. That is a huge shift upwards, and unsurprisingly, despite the fact that very few owners actually have capesizes in their fleet, the effect this is having on sentiment, extremely important in my view, is exponential. Unsurprisingly this is affecting the sale and purchase market too, in all sizes.

 

To be fair, Peter’s comments were about the difference in freight rates (and values) between 2007/2008 and now. I would point out that 2007/2008 was only the top of the cycle – it started in August 2003, and took everyone by surprise. By 2007/2008 owners had a lot more money in their pockets.

 

But my feeling about the booming freight and sale and purchase market is contradicted by other increasingly bearish news coming out of China:

 

          Iron ore imports fell to 88.5 million tonnes in July, the lowest level since May 2020

–          Benchmark iron ore futures in China extended losses for the third consecutive session, diving more than 7% and sending the price to its lowest since 5th February, dented by gloomy demand and a forecast of an increase in supply

–          China’s steel production fell to 86.8m tonnes

 

However, as Dr Adland may agree, none of this necessarily has any effect on tonne mile demand (and certainly has no effect whatsoever on the short-term supply of ships) that drives the spot capesize market.

 

Now I don’t for one minute suggest that I have the numbers, research, analysis or brains to work out what is really going on. There are a number of reasons for this:

 

–          I am a working S&P broker and can only absorb as much news and comments as my time and brain will allow – there are other things to be getting on with

–          My own bias is therefore what is happening in – and what may happen to – my market in the short and medium term

–          I have mood swings too (depending on how well my week is going) and I cannot ignore that stories I read, and conversations I have, do not affect my own interpretation of the market

–          Most importantly, the arrival at price – and terms – discovery is the combination of conflicting stories (called negotiations) reaching consensus (called agreeing a contract)

 

Choosing your story is very important. I hope that Dr Adland and Peter have time to stand above the fray and observe the bigger picture, more than I do anyway. But for what it’s worth here is my summary:

 

–          Prices are still below (just) values in 2014, the last big peak in values

–          I was telling people then not to buy ships because I didn’t believe in the start of a new dry bulk freight market cycle then

–          I don’t believe in inevitable and uniform shipping cycles, but I do know that undersupply (like now) and oversupply (like 2016 at its worse) take some to work out

–          Past performance is no guide to future performance

–          There is no such thing, in tramp shipping at least, as leading indicators

–          This recovery in the freight market has been driven from the bottom up, i.e. handies and supramaxes, not top down, i.e. from capesizes

–          China is no longer the only thing that drives drybulk shipping, although it does, I admit, have an overwhelming effect on capesizes

–          China is still not importing Australian coal in capesize bulk carriers

–          I am writing this during the ‘traditional’ summer lull, and the market is booming prior to the ‘traditional’ strong last quarter

 

I do however see a shadow in the skies: in the shape of a meteor. The FT reported, somewhat tongue in cheek:

 

The asteroid Psyche 16 may contain iron worth $10 quintillion at earth prices, 100,000 times the planet’s current GDP….. if you brought this much iron back to earth, supply might somewhat outstrip demand. The price of iron ore could conceivably fall.

 

Let’s be clear – technology is nowhere near being able to bring this to earth, safely or otherwise. It arriving on earth by itself would surely cause a little more disruption than to the iron ore futures market. Similarly technology is nowhere providing the tool to control or predict the future of the dry bulk freight market. It all makes me feel a bit small, but that’s how it should be. We are all small players, in shipping and in life, however big we think we are, and whilst at sometimes that fact can be depressing and frustrating, it also brings some comfort that we’re all in the same boat and the sea is still, thankfully, a very big place.

 

Simon Ward