This may be the time for the summer doldrums, but ocean shipping freight rates and charter markets are far from sleepy. Rates that were good last week are even better this week.
Dry bulk remains the biggest story. Bulker rates, especially those for ships booked in the Atlantic Basin, are reaching levels not seen in years.
Meanwhile, freight rates are on the upswing for containers bound for the U.S., and the liquefied natural gas (LNG) shipping segment continues to slowly gain traction, albeit not at the pace seen at this time last year.
It’s all about the BDI
It has been a long time since the Baltic Dry Index (BDI) has garnered this many headlines.
The BDI is a daily composite of time-charter averages of Capesizes – bulkers of 100,000 deadweight tons (DWT) or more – Panamaxes (65,000-90,000 DWT) and Supramaxes (45,000-60,000 DWT).
You cannot directly trade the BDI, although an exchange-traded fund has been developed (NYSE: BDRY) to approximate its moves through the purchase of futures contracts pegged to the underlying time-charter indices.
On July 18, the BDI reached 2,130, its highest level since December 2013, five-and-a-half years ago. If it climbs much higher, it will hit levels not seen since 2010, nine years ago. The all-time high of the BDI was 11,793 in May 2008; unprecedented BDI levels recorded in 2007-08 are generally considered a one-off event that has never been seen before or since.
“It’s another electric day in the Capesize market,” proclaimed Clarksons Platou Securities analyst Frode Mørkedal in a client note on July 18. “Demand out of Brazil has acted as the catalyst for a surge in rates in both basins, with earnings reported this morning at the highest level since December 2013.” According to Clarksons, Capesize rates are $32,200 per day, up 18 percent week-on-week and up 116 percent month-on-month.
“In the Panamax segments, rates have improved on the continued tight market in the Atlantic, and a steady Pacific,” said Mørkedal. Clarksons reported that on July 18, Panamax rates were $17,600 per day, up 13 percent week-on-week and 65 percent month-on-month.
Panamax demand has two key drivers. First, larger Capesizes are scarce in the Atlantic Basin, both because they’re being soaked up by the Brazil-to-China iron-ore trade and because they’re being pulled from service for installation of ‘scrubbers,’ which are required for vessels that continue to burn high-sulfur fuel after the global sulfur cap on marine fuel and emissions is enacted on January 1, 2020.
Because of the scarcity of Capesizes, loads that would normally be carried on Capesizes are being split into smaller parcels and loaded on Panamaxes, increasing Panamax rates.
The second driver for Panamax rates is South American soybeans. “With no trade deal between the U.S. and China in place yet, it seems that Chinese buyers have leaned back to Brazilian grains to rebuild inventories,” said Mørkedal.
Despite all this good news, there is understandable skepticism regarding the fate of dry bulk rates. According to the latest weekly report of Athens-based ship brokerage Intermodal, “It is only natural that a number of market participants that have lived through the wild ups and downs during the past years remain cautious. The second half of the summer will test how fundamentally strong the market really is.”
Public companies with spot Capesize and Panamax spot exposure: Genco Shipping & Trading (NYSE: GNK), Golden Ocean (NASDAQ: GOGL), Scorpio Bulkers (NYSE: SALT), Star Bulk (NASDAQ: SBLK), Safe Bulkers (NYSE: SB), Seanergy (NASDAQ: SHIP)
China-U.S. box rates are rising
Rates on the Asia-U.S. trans-Pacific container route continue to edge up, suggesting that demand may finally be rebounding.
According to Amit Mehrotra, transportation analyst for Deutsche Bank, “After declining throughout the second quarter behind rising trade tensions, China-to-U.S. freight rates continue to build momentum. Rates have now rebounded 20 percent after bottoming in late June.”
He continued, “China-U.S. freight rates now stand at the highest level since February, before the Trump Administration raised tariffs to 25 percent, from 10 percent, on $200 billion of Chinese goods.”
Mehrotra acknowledged that some of the recent container freight rate improvements could be seasonal, but he said that it also could point to “increased freight demand from retailers who have drawn down inventories in recent months.” He noted that healthy U.S. retail levels and declining imports through California ports offer “evidence to support the destocking thesis.”
“For this reason, we see opportunity for volumes to re-accelerate in the second half as retailers are forced to restock inventories despite the tariff impact. We have heard anecdotes of an inventory glut at Chinese ports as shippers await more clarity on the outcome of U.S.-China trade tension,” he reported.
The Freightos Baltic Daily Index (China North America West), which tracks the cost of shipping a 40-foot-equivalent unit container across the Pacific, is up 19 percent over the past month. The Freightos China-U.S. East Coast index (FBXD.CNAE) is up 11 percent over the same period, while the global index (FBXD.GLBL) is up only 5 percent – implying that Asia-U.S. demand is a particularly strong driver in comparison to other worldwide trades.
LNG good, but not ‘2018 good’
The good news for LNG carriers is that spot rates continue to inch up. The caveat is that rates are going up slowly and they were considerably higher at this time last year.
Where rates are today is important because it points to future sentiment of charterers. If there is a belief that ships will be unavailable in the peak winter months, charterers will ink deals earlier in the year. The more they do so, the earlier in the year rates move up.
In 2018, rates rose unusually high starting in June, when a modern tri-fuel diesel engine (TFDE) LNG carrier commanded spot rates of almost $80,000 per day, on par with rates in the peak 2017-18 winter months. By this time last year, TFDE spot rates had pulled back a bit, to $65,000 per day – but then they began their historic ascent, to all-time highs of almost $200,000 per day in November 2018.
Starting in December 2018, LNG shipping spot rates began a collapse that was even steeper than their rise. By late March, TFDE spot rates had slumped to around $35,000 per day, flirting with or below break-even. According to Clarksons Platou Securities, TFDE LNG rates as of July 18 were $59,000 per day, up 7 percent week-on-week.
A key market dynamic difference between this year and last year is that in 2018, spot rates for the LNG commodity itself were much higher in Asia, which spurred shipments from the U.S. by traders pocketing arbitrage profits. Today, Asian LNG pricing is low.
According to Mehrotra, “LNG spot markets continue to lack direction. Nonetheless, LNG shipping markets remain in a solid place and we have observed some underlying tightening in recent weeks with seasonal tailwinds starting to creep into the market.
“While soft Asian LNG prices have weighed on arbitrage trading year to date, ‘contango’ in LNG commodity markets should promote vessel demand and even storage opportunities,” he said. Contango refers to a market dynamic wherein the futures price of a commodity is higher than its spot price, implying a belief that the price will rise.
“To this point, recent reports have emerged that buyers are considering storage to take advantage of the soft commodity price,” said Mehrotra. “This supports our view that 2019 peak season will get pulled forward as buyers look to avoid the vessel shortage that plagued LNG buyers in the fourth quarter of 2018.”
Public companies with spot LNG shipping exposure: GasLog Ltd (NYSE: GLOG), Golar LNG Ltd (NASDAQ: GLNG), Flex LNG (NYSE: FLNG), Cheniere Energy (NYSE: LNG)