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Dry Bulk Market’s Rebound Not Directly Linked to Demand Growth

The dry bulk market’s latest rally, most notably in the Capesize market, while welcome, isn’t entirely down to fundamentals and as such, could be short-lived. In its latest weekly report, shipbroker Allied Shipbroking noted that “while the Covid-19 pandemic seems to be escalating once more, the global markets seem to be heading back into shock and uncertainty. Despite though the overall disarray in global economic conditions, the dry bulk sector has set upon it a completely different trajectory during the past month or so. Has this been down to a change of pace to be further seen in the market over the coming months, or a simple asymmetrical distribution of activity, with no clear indication of the direction moving forward?”

Source: Allied Shipping Research

According to Allied’s Research Analyst, Mr. Thomas Chasapis, “the dry bulk market has undergone a relatively excessive upward rally during these past few weeks, mainly due to the steep positive momentum and activity in the bigger size segment. The BCI 5TC almost touched the US$ 30,000/day during the latter half of the previous week, a level not seen in the market since the onset of the final quarter of 2019. Given that year-to-date the average figure posted is below the US$ 7,000/ day mark, while m-o-m this index grew almost 9-fold(!), it seems hard to believe that the overall market conditions could have changed so rapidly. Witnessing such a level of disconnect in the market between such close consecutive time frames, it is only reasonable that most have embraced this change with some sort of “hesitation”. After all, given how fragile and volatile the current market fundamentals are, the chances of such a mere positive shock to last and leave its positive mark are very low at this point”.

Chasapis explains that “it looks as though we are experiencing another (but positive one this time!) “dissonance” derived both by the mechanisms themselves within the shipping industry and the unique circumstances the global economy has been under since the outbreak of the Coronavirus pandemic. Regardless of the reasoning behind this, either it be a sudden positive shock in fundamentals from the demand side or as part of the amassed cargo volumes due to the disruptions that have taken place earlier on in the year, the recovery of late has been a fair “breather”, both in terms of sentiment and liquidity. This is especially important now given the prolonged period noted in which freight earnings have been close to (or even below) OPEX levels”.

Source: Allied Shipping Research

Allied’s analyst added that “this positive momentum has been even more emphatically portrayed in the derivatives market, with closing numbers in different FFA contracts noticing a hefty jump (especially for those with short-term duration). Even more impressive has been the 12.1% m-o-m increase in FFA contracts of the forward year 2021 and the 5.9% increase for 2022. One wonders however, to what extent can these improvements noted in forward sentiment be driven by the current macroeconomic environment. Some could argue that the different dynamics (as liquidity) in this sub-market are often prone to creating many exaggerations, with a swift change in short-term trends often amplifying this effect further. It is no surprise therefore that during the past couple of months we have seen a steep correction in the trends being portrayed in the futures market. All-in-all, despite the obvious link between higher returns and improved sentiment in the market, the key factor to look for at this point is the potential duration of these better returns. A longer period of good market rates (even if not impressive), will be of great help in erasing some of the excessive “noise” noted in the market and channeled adequately to all aspects of the market. In other words, the market needs to rebalance itself, even if this means to adapt to a relatively “mediocre” state for a while. At that point, we can potentially experience less disconnect with the FFA market or even note a more robust SnP market with a tighter bid-ask spread in asset price levels”, Chasapis concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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