It’s a cruel, cruel summer for Capesizes but things are about to change | Report
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Over the last few months the spot Capesize market has failed to match the overly optimistic expectations that the futures curve has been pricing all along. A futures curve, that was priced to perfection, has now crumbled back to reality, as the macro picture out of China has been abysmal, while the factors that led to the impressive rally last year have now dissipated. Unfortunately, freight futures tend to overreact and, amazingly enough, tend to look backwards for clues about the future. Yet, we see an opportunity due to the above realities and we believe now is the time to become more constructive on the near-term future of dry bulk. We think over the next few months spot rates will recover beyond what is priced in the futures curve. In fact, we are now the most optimistic we have been so far this year.
Such a prediction might sound counterintuitive given the state of the current spot market (which indeed is anything but good), but once again, cyclicality should be our friend, and thus, we believe spot rates are about to bottom. China’s economic activity is set to ramp up, the credit cycle in China has already bottomed with credit impulse clearly in an upturn, while the Chinese steel market has hit levels never seen before thus some expansion there should be imminent. Although daily price fluctuations rely a lot on regional balances and thus are unpredictable, we feel that the broader freight market balance will soon turn and rapidly push charterers to take cover. Risks remain abound, but the current level of futures combined with the bottoming macro in China warrants a bullish stance towards dry bulk.
