Baltic Dry Index follows drop in forward rates
The Baltic Dry Index (BDI) retreated yesterday following a plunge in forward freight contract rates, as shipping companies concluded the rally in the bulk shipping market was unsustainable.
The forward rate of the benchmark for the third quarter dropped 37 per cent to US$38,000 per day yesterday from US$60,000 three days ago.
The index itself, which tracks spot charter rates on various bulk ships, lost 4.6 per cent to 4,093 points on Thursday, ending 23 consecutive days of increases.
'The rationale here is, if a charterer can get a ship for US$38,000 per day for July delivery, why pay US$85,000 for spot delivery now?' Credit Suisse said in a statement yesterday.
Shares in bulk shipping companies dropped yesterday, tracking the BDI's downturn.
China Cosco Holdings, the world's biggest operator of bulk vessels, closed 4.33 per cent lower at HK$10.60. China Shipping Development slid 2.78 per cent to HK$11.20, while Pacific Basin fell 4.67 per cent to HK$5.51.
'BDI historically corrects sharply with major declines in futures, and current futures suggest BDI could fall to 2,900 points, implying 30 per cent downside,' Credit Suisse said.
Geoffrey Cheng, a transport analyst at Daiwa Institute of Research, said that based on historical patterns, a collapse of spot BDI rates was looming: 'Last year, the forward freight agreement for all periods for cape-size vessels peaked one day before spot BDI peaked.'
The reason behind the more than fivefold increase in the BDI this year was the strong demand for cape-size vessels to deliver iron ore from Brazil or Australia to China.
The strong demand for imported iron ore is driven by price arbitrage opportunities on the commodity. Spot iron ore is cheaper than contracted iron ore.
Mainland traders restocked iron ore at ports, pushing inventory to more than 70 million tonnes at the beginning of the month.
Once the iron ore talks between mainland steel mills and Australian miners concluded, the difference between the spot and contract prices would narrow and restocking would unwind, Mr Cheng said.
The impending capital squeeze for steel mills and traders would also speed up the process of destocking.
Beijing told mainland banks three weeks ago to restrict lending to the domestic steel sector.
This could mean traders might soon start to unwind inventory to improve cash flow and lock in profits, Credit Suisse said.