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Why Capesize vessels are outperforming other ship vessels in rates

Xun Yao Chen - Author

Nov. 20 2020, Updated 1:11 p.m. ET

Supply and demand drives dry bulk shipping companies

Unlike imports data that aren’t widely available on a weekly basis, shipping rates (which reflect the difference in supply and demand) are collected daily at the London-based Baltic Exchange and published as the BDI (Baltic Dry Indexes). These indexes reflect the daily shipping rates to transport key dry bulk raw materials in the spot market. When demand outpaces supply growth, shipping rates tend to rise. But when an increase in supply doesn’t meet with demand, shipping rates fall. [1. The two main revenue generation models in the shipping industry are spot (voyage) and time (period) charters. “Spot charters” refer to the one-time price of shipping a specific amount of raw material, while “time charters” reflect the price of borrowing a ship’s service for a specific period. “Time Charter Equivalent” (TCE), which converts spot charters (specified in $ per ton) to time charter rates ($ per day), is often used to compare companies in different markets. The two often mirror each other over the medium and long terms.]

Capesize outperforming other ship classes

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During the week from August 12 to 16, the BDIs for Supramax and Panamax vessels fell from 521 to 517 and 1,813 to 2,112, respectively. Capesize index, on the other, jumped from 1,813 to 2,112—its largest increase since June. The increase in shipping rates for Capesize reflects higher iron ore or coal shipments. These vessels are outperforming since they’re primarily used for shipments of dry bulk. Their large sizes also make them much more economically efficient compared to Panamax vessels, which can also carry dry bulk but are smaller.

Past patterns, support, and upsides

Historically, rates for Capesize vessels have risen during the second half of the year, as shipments out of Australia and Brazil grew. This year, we may experience the same pattern as new mining capacity factors in. Higher shipments would mean less incentive for companies to scrap or delay vessels—unlike last year, when the Capesize index fell to just above 1,200. That could limit upside potential in Capesize rates, but it also means that if rates were to fall back to just 1,200, companies would likely delay extra new deliveries and scrap old vessels again, which would support shipping rates.

Outlook for shipping rates and implication

Investors can look forward to higher Capesize rates during the second half of this year compared to the first half. If rates do fall, it could present a long-term opportunity for companies like DryShips Inc. (DRYS), Navios Maritime Partners LP (NMM), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM) since rates are turning around. As there are some overlaps in the kinds of dry bulks each vessel carries, higher Capesize rates will also support Supramax and Panamax vessels.

For other interesting indicators, please visit our Marine Shipping page. We also recommend two additional indicators published last week, starting with Forward Contracts, where you’ll see the second indicator as well.


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