*For the first quarter 2020 Baltic Dry Index has slipped more than 40%
*If better volumes out of Brazil you wouldn’t be surprised to see the BDI double
The futures are telling you that it will be the worst April ever and the worst second-quarter ever. There are clear risks to the downside, as well. First, coronavirus could cause a global recession or depression, curbing industrial production, including in China, thereby reducing steel production and thus demand for Capesize cargoes. Coronavirus could re-flare in China itself, shutting down the steel mills, terminals and transport systems yet again. It could shut down the export centers for Capesize cargoes. This is already beginning to happen.
Subsequently, Force Majeure was declared in several countries and integral shipping ports, as nervousness enveloped the market. The Baltic Dry Index (BDI) has shown its largest daily rise in almost two years, following significant gains. It was on 31 March 378 point and on Friday 616 point. For the first quarter of 2020, however, the index has slipped more than 40%. The Index bottomed out at 411 on February 10, and traded as high as 2,518 September 5.
Rates for Capesizes, bulkers of around 180,000 dead weight tons (DWT), carry iron ore and coal, have wallowed disastrously in the $2,500-$5,000-per-day range since January. Panamax rates for front haul trips, basis delivery Southeast Asia and India positions, were fixed in the $8,000’s, with one very well-described 82,000dwt vessel achieving $9,500 from Singapore. Supramax rates for Black Sea to China route losing $1,518 on the week to close at $16,782.
This will be the second-worst quarter ever for Capes after the first quarter of 2016. Now is typically the time of year when rates turn and begin their seasonal climb, but this is not a typical year. April forward freight agreement (FFA) Capesize contracts closed at $4,381 on Thursday. The second-quarter FFA closed at $6,083 in early January, the second-quarter contract traded at $11,500.
The two most important Capesize trades are Brazil-China and Australia-China. Even though rates from Australia have been lower than from Brazil, ship brokers maintained that Brazil is the root of the problem. This is not about coronavirus. This is 90% about Brazil, have been cut in half. Rates out of Brazil have been weakened by a shortfall of iron-ore exports by miner Vale. There are two reasons: unusually heavy rains and on-going safety precautions stemming from 2019’s tailing dam accident.
March is going to be a record low for exports out of Brazil, and without Brazil, the Cape market cannot recover, they said. Despite the coronavirus shutdown in China earlier in the quarter, brokers do not believe the problem is lack of demand from that country. Chinese steel production is back to normal levels as of last week. Iron ore is at $90 a ton, the best-performing commodity in the world right now.
If there was a lack of demand from China it would be at $60. Iron-ore prices are telling you that the market is tight. If you get better volumes out of Brazil, I wouldn’t be surprised to see the BDI double. Then why is April and second-quarter Capesize FFA contracts so low? Everybody’s affected by what’s happening with coronavirus, sitting at home and trying to make sense of the world.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 6-4-2020