By Greg Miller of FreightWaves
When dry bulk shipping rates are very high and someone tells you they’re “volatile,” it’s a euphemism for: Don’t be surprised if they fall off a cliff.
Well, they’ve fallen off a cliff. On a positive note, the climber hasn’t plunged all the way to the valley yet. He’s still clinging to the rocks partway down. U.S.-listed shares of dry bulk owners followed rates downward Tuesday — but it wasn’t just dry bulk shares, even though they suffered the largest losses. Stocks of tanker and container-ship owners also pulled back. The screen of shipping equities was a sea of red, even as the broader stock market went higher.
Dry bulk stocks
Rates for Capesizes (bulkers with capacity of around 180,000 deadweight tons) are particularly volatile because they’re beholden to Chinese iron-ore demand, which is now being curbed by cuts in steel production.
“Yells of ‘Timberrrrr’ could be heard across the Capesize market today as rates came crashing down rapidly everywhere,” said a report by London brokerage Thurlestone Shipping on Tuesday.
Clarksons Platou Securities reported that Capesize spot rates had fallen to $27,200 per day on Wednesday. On one hand, that’s still above the 2016-2020 average for this time of year of around $20,000 per day. On the other hand, 2016-2020 was a terrible half-decade for dry bulk, and current spot rates are down precipitously from a high of $87,000 per day just five weeks ago.
Dry bulk shares have logged triple-digit gains over the past year, but peaked in late September. Asked about the recent pullback in these equities, Jefferies analyst Randy Giveans told American Shipper: “Had rates not shot up to the 80s, they probably wouldn’t have gone to 30. It makes the chart that much more dramatic, but $30,000 is still a good rate. I think everyone’s myopically looking at the forward curve and spot rates, but time-charter rates are still decent and asset values are still very good.”
The forward curve, as seen in the price of dry bulk forward freight agreements (FFAs), has taken a beating. In early October, the Q1 2022 Capesize FFA contract was trading at around $28,000 per day. On Tuesday it was down to $15,100. Brokerage BRS wrote, “Given the extent of the drop, there can be little doubt that the drop was exacerbated by long positions being stopped out and portfolios being liquidated.”
Giveans commented on the derivatives action: “When FFAs were going up to $28,000, everybody said, ‘Oh, that’s just the paper market. It’s not really a good determining factor for spot rates.’ Now everyone’s hanging their hat on the FFA curve. If it’s a bad predictor of rates a few weeks ago, how can you have it both ways?”
Shares of the Breakwave Dry Bulk Shipping ETF — an exchange-traded fund that buys FFAs — sank another 13% on Tuesday. It has shed nearly half its value versus the Oct. 6 high.
Shares of Golden Ocean and EuroDry fell 8%, Star Bulk and Eagle Bulk 7%, Safe Bulkers 6%, Genco Shipping & Trading 5%, and Grindrod 4%.
Almost all tanker stocks also closed down on Tuesday. Scorpio Tankers and Ardmore Shipping fell 4%; and Nordic American Tankers, Tsakos Energy Navigation, Torm and DHT 3%.
Despite rising oil prices and resuscitating demand, there have been some negative headlines: OPEC rebuffing calls to increase production faster, a setback in talks with Iran due to new U.S. sanctions, lower crude exports out of Nigeria, and a Chinese release of gasoline and diesel reserves.
Clarksons reported Tuesday, “Sentiment has weakened in the Middle East Gulf. A broker noted that charterers are trying to break last done as cargo remains thin on the ground.”
Asked why tanker stocks were under pressure, Evercore ISI analyst Jon Chappell told American Shipper: “I think for two reasons. One: Commodity-related stocks in general are under pressure — see dry bulk and LNG [liquefied natural gas] — and two: OPEC is sticking to its guns, despite the higher oil prices and pressure from the Western world.”
According to Giveans, “If you look at tanker equities over the last two months, they’ve done good, much better than rates. Rates have looked like they’ve gone up 100%, but off what? From $5,000 to $10,000 per day? I think equities just got a little ahead of rates and this is an understandable breather.”
Container stocks — and the China connection
Unlike tanker rates, charter rates for container ships are near record highs. Yet shares of container-ship lessors, which performed exceptionally well in January-August, also retreated on Tuesday. Euroseas fell 4% and Danaos and Costamare (NYSE: CMRE) 3%.
Giveans maintained, “It’s really similar to dry bulk. Yes, rates are going to be lower in containers in 2022 sequentially, but they’re going down from extraordinary levels. Container [ship leasing] rates went up 72 weeks in a row and now they’re down 1% and some people think it’s the beginning of the end. The same for container [freight] rates. The SCFI [index] is a little bit lower, but we’re not going back to pre-COVID levels.”
The other possible reason for a pullback — which relates to almost all shipping stocks — is China.
“Everyone just correlates China and shipping,” said Giveans. “Because of diesel reserves [being released] and crude demand for tankers, and obviously dry bulk demand is huge in China for iron ore and coal, and with containers coming out of China and factory production slowing.
“So, there’s a ton of exposure throughout all of shipping to China and Chinese economic development. Anytime you see macro concerns, especially China-related concerns, that’s when you see some selling.”