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Dry Bulk Market: Things Will Get Worse Before They Improve

The dry bulk market has been on the downside for 20 straight sessions now, indicating that a weak sentiment has settled for good. To make matters worse, in three weeks time comes the Chinese New Year, traditionally a low point for the market in terms of demand. As a a result, it seems that the start of the year will definitely be rocky for dry bulk owners, to say the least.

In its latest weekly report, shipbroker Allied Shipbroking noted that “from the onset of 2020, the dry bulk sector is already facing a “noisy” market in an emphatic way. Freight rates (with the Capesize segment leading the way) are in a free fall, just 3 weeks prior to the Chinese New Year. Fragile trade relationships, as well as, the bunker price differential shock, leaves little room to speculate as to why this is going on. For the time being a quick summary of the year past may well be in order so as to better understand the current state of the market”.

According to Allied’s Research Analyst, Mr. Thomas Chasapis, “trying to be optimistic, I would start with the macro trends and more specifically the further decrease of the orderbook, on the basis of what was noted up to early December, it looks as though we reached an impressive ease back of 30%. Through this ease back we noted an in service fleet increase in the region of 3% in terms of number of vessels and 4% in terms of DWT capacity. Moreover, with the orderbook to fleet ratio remaining below 10%, we may well say that from the supply side of things the improvement is apparent. Undoubtedly the most impressive thing we saw last year was that of the Capesize market during the final quarter of the year, were we saw rates sustained well above the 20,000 US$/day mark”.

“Moreover, during the final month of the third quarter all size segments managed to reach long term period highs in terms of freight returns, boosting overall sentiment and expectations significantly in the market. Despite all the above, there is always a down side at play. Without undermining the major step achieved the past couple of years on the supply side, it looks as though we may well prove to be topside heavy given the potential for a further softening in seaborne trade growth. The bullish periods in terms of freight earnings have not been without cost. The aftermath of a series of tail-risk events (with the peak of these being the Vale incident) has pushed the freight market several times to the doldrums, while at the same time, volatility and uncertainty have skyrocketed. All-in-all, we can say that 2020 will be a challenging year. Whether this will be as a result of all the regulatory changes taking shape, with blurred signs as to how they may or may not affect the overall market’s stability and tighter marginal earnings (or to put it more simply, who will pay the difference!), it looks as though it is too early to call”, Chasapis said.

He added that, “given that volatility, as well as uncertainty is positively correlated with the above, the future remains rather puzzling. At this point, given that most interested parties are less concerned with what we have already seen and more with how things may be shaped, I would suggest sticking with what the paper market has to show for the time being. We have pointed countless times to the bearish mode of long-term forward sentiment that is portrayed in future contracts. Volatility, uncertainty, or whatever combination of both can be easily traced as the main culprit of this trend of late. Despite this, it looks as though the market is currently experiencing a type of “meanreverting” tendency, with most bets for the next 5-year period being a mere reflection of what we have seen during the previous 5-year “cycle”. Looking at this from a different perspective, this points to a level of stability (even if it means a “mediocre” market). Albeit that for those who still envision a market that can reach the exceptional highs of more than a decade ago, the current market is but a tremendous step-back, for all the rest it would seem that these returns still seem to be enticing from an investment perspective”, Allied’s analyst concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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