URSABLOG: Banging on a Different Drum

So now things are hot. I don’t just mean the summer weather – here in Greece it’s just cooled down a bit after a sweaty week – but the dry freight market. We are all watching as the Baltic Dry Index stretches to burst through the 2,000 barrier, last seen since…

Sorry, I was getting a bit carried away. Don’t expect me to emulate my other brother and sister brokers and drown you in enthusiasm because some numbers are rising and rising quickly; I am too old and too cynical. Numbers are admittedly seductive though, especially when put on a graph. To show you what I mean have a look at the following graph:

Looks wonderful doesn’t it? Now look at this one:

It’s just an extension of the same graph a little further back, but it also is a little harder to interpret. We can describe both in detail, and more than that our minds picture what happens at the end of the graph, extending the gradient of the graph upwards . The market in both cases says GO! But perhaps those with longer memories may say “hold on, let’s wait and see, we may be too late.”

Except, before you run out and buy a ship, you should know I’ve just made up these graphs. Completely. They came out of my brain. They could be about anything: pineapple futures, umbrella deliveries, downloads of kitten videos online. The time line could be months, years or minutes, seconds. And yet we read the picture and draw our conclusions because our brains are telling us “Look! Positivity! Let’s act!”

I am not saying that things are going to end disastrously, but let’s look at yesterday’s five-year time series for the BDI, courtesy of Bloomberg:

How can we interpret this? The gradient now is very steep, there looks like a lot more to come. Is it time to buy?

Last week I mentioned that my feeling for the recent upwards burst is a tightness in the Atlantic market for the larger sizes and that it may not last. I could well be wrong of course, but certainly tonnage is being sucked in quickly. I know of at least two cases where kamsarmaxes or panamaxes are being ordered by charterers (who happen to be operators) to ballast across the Pacific Ocean from Far East Asia, and through the Panama Canal to the US Gulf to load. This, as was pointed out to me, is a million-dollar investment by the charterers. But it has, to me at least, two different interpretations. Either: 

1) the cargoes have already been booked and time is of the essence to get the ships there as soon as possible;

or

2) the cargoes have not yet been booked but the charterers want to be sure that they take advantage of current spike, and get there as soon as possible before the party is over: time has taken priority over cost. 

I would love to know whether the charterers are insisting on eco speeds; I suspect not. There may be other reasons too which no-one except the charterers are privy too.

I am trying to remember different times in the past when the market took off and the market remained high for a while but memory is a funny thing. We remember the times and places we were, who we were with and how we were feeling, not usually in terms of numbers and hard facts. My memories of late 2003, early 2006 and mid 2009 are of a market where the charterers were trying to fix for as long as possible to secure tonnage at low hire rates. My memories of 2013 into 2014 however were of a spike that was unsustainable. I tried to tell as many people as possible then not to buy, but I made an error of judgement: they listened to others and bought anyway – through the other brokers who were much more optimistic as me – I was right in the analysis, but didn’t do much business. It was a lesson to me, but one perhaps I have failed to learn: I still believe in calling it the way I see it. 

The Forward Freight Agreement (FFA) market – erroneously called the futures market – is not much help either. The recent gains there reflect the gains already notched up in the physical market; the long-term prospects are far more lukewarm. Charterers are there to fix 5-7 months, 6-8 months at current numbers but not much more.

So until the charterers break the shackles of the FFAs and start aggressively fixing long term period deals (by long term I mean a year and longer) at better numbers, then I will continue to think, for the larger sizes at least, that this is a short term boom driven by positional tightness in the Atlantic. After all neither demand or supply fundamentals have changed that much in the last few weeks.

As for the smaller sizes I am more positive. Obviously the Atlantic is hot, but so is the Med/Black Sea, PG and South Asia. China is not a good place to have a ship open at the moment, or most other places east of Singapore, but the gravitational pull of the west is resulting better period business. The sale and purchase market shows this too: there are a number of handies and supramaxes that have been for sale for some time that having recently received offers have been withdrawn and extended on period charter because a) the prices offered were too low, and b) the period market is better. The hot spots I have mentioned above will alleviate oversupply in the dead zones, and gradually things will improve. Buying a handy, or a supramax, or an ultramax is a better bet than it was a month ago, assuming the sellers don’t get too carried away with their price ideas, which of course they are perfectly entitled to do but it may still have the same result: no sale.

Shipping investment is all about timing, but for the dry bulk markets it’s all about the rhythm. The big drum of the cape spot market will beat louder and faster as the market gets better, and like any good beat it makes us all feel good, but it always takes a while for the rest of the rhythm section to get going. The period market needs to get into a longer groove for the sale and purchase market to get into its’ own vibe, especially for the smaller sizes. But to see an overall and sustainable recovery in the bulk dry market the whole orchestra has to be playing in tune, and at the moment they are only just warming up. In the meantime, let’s get ready to face the music, and dance.

Simon Ward

www.ursashipbrokers.com