Capes at a Two-Year Low and Gas Markets Volatility

Freight up.

Hello and welcome back to Freight up, the freight and commodity podcast of Freight Investor Services.

I'm Jess and together with Davide, we will be your hosts as we navigate our major freight and bulk commodity markets.

We are back in the booth talking about more freight and commodities.

Well hello Jess.

Hello everyone.

So in this episode we are joined by Ben Klang who will be giving us his update on the freight market.

Haupei will chat with us about the state of the iron ore market and the coking coal market.

And William Addison, our carbon emission broker, will talk about the recent developments in the European carbon and gas but let's first look at the latest news and the index movements of the last two weeks.

The US economy added 140,000 jobs in January, significantly below December's upwardly revised 307,000 gain and short of the 170,000 forecast.

Meanwhile, the unemployment rate dipped 0.1 percentage points to 4%, its lowest level since May, slightly beating market expectations of 4.1%.

Annual core consumer price inflation, which excludes food and energy, edged up to 3.3% in January from 3.2% in December, surpassing the 3.1% forecast on a monthly basis.

Core prices rose 0.4%, doubling December's 0.2% increase and exceeding expectations of 0.3%, marking the fastest rise since March 2024.

In China, the annual inflation rate climbed to 0.5% in January from 0.1% in December, exceeding the 0.4% forecast.

This marks the highest level since August 2024, driven by seasonal effects from the lunar New Year.

The British economy expanded 0.1% quarter on quarter in the fourth quarter of last year, rebounding from stagnant growth in the third quarter, and defined the forecast of a 0.1% contraction in December.

The GDP rose 0.4% month over month, the strongest growth in nine months, following a 0.1% gain in November and surpassing expectations of a 0.1% increase.

On an annual basis, the economy grew 1.5% in December, the highest since October 2022, after an upwardly revised 1.1% increase in November and above the 1% forecast.

What about the market movements of the last few weeks?

Let's take a quick look, starting with Capes.

The C5TC declined from $6,998 of two weeks ago to $6,282 yesterday.

In the Panamax segment, rates climbed from $8,112 on 4 February to $9,101 on 11 February reaching $9,375 yesterday.

Supramax also saw an upward trend with the S10TC rising from $5,615 two weeks ago to to $8,239 on 18 February.

Lastly, Handy size rates increased as the HS7DC surged from $6,679 two weeks ago to $8,989 yesterday.

Good morning Ben Good morning Jess.

So as usual we'll be discussing dry bulk freight rates, the trends we've seen over the past two weeks and what could be ahead for the market.

So let's start with the bigger picture.

Over the reporting period from February 4th to February 18th, we've seen a bit of a mixed bag and dry bulk freight rates.

Could you give us a bit of an overview of each of the key market movements?

Yes, absolutely.

So as the end of last week, here's some quick stats that kind of summarize the state of the dry FFA at the minute since the start of Q4 2024 Cavesize rate has fallen by 56%, Panamax rates by 20% and Supermax rates has fallen by 54%.

Though of this yesterday we're seeing a more positive sentiment across all segments.

If we break this down by vessel category, the cave size segment has taken the biggest hit, especially on the prompt.

The February contract opened at 8,750 on the 4th of Feb and then dropped to a two year low, bottoming out at 6,750 this past Monday.

However, we have seen a bit of a recovery with rates kind of pushing back up to $7,125 yesterday.

The Q3 contract also saw a dip, dropping to 17,850 on the 11th of Feb before rebounding to 18,825.

And for the Panamax vessels the decline has been less severe.

The Panamax contract opened at 7,700 and dropped to 7,350 on 12 February before recovering this week to $8,300 per day.

The Q2 contract was relatively stable during the first week of the reporting period, moving from 10,975 on 4 February to 11,475 on 11 February.

However, over the past week we've seen some more pronounced rise with rates climbing up to 12,900 by 18 February.

And interestingly, the Supermax market has shown more resilient while the larger vessel segment struggled.

We saw some significant upward movements here.

The Q2, contract for the Supermax increased from 10,825 to 13,125 over the reporting period.

So given that, what are the key drivers behind these market movements and why has the Capes ice segment particularly been hit so hard?

Well, there's a few factors at play here.

First, we haven't seen a strong post Lunar New Year recovery in the Capesize demand.

Typically after a holiday period we expect an uptick in Chinese industrial activity which naturally drives the demands for iron ore and coal imports.

But so far that rebound hasn't materialized in kind of any meaningful way.

And second, while we did see an increase in bauxite in iron ore loading in January, it hasn't been enough to support the Capesize rates.

Additionally, the market is still dealing with many ballast vessels in the South Atlantic.

And another key factor is that the Panamax vessels has been eaten into the Cape sized coal volume.

And this trend has kind of developed for a while but it's particularly noticeable now when when Capesize rates were high, some cargoes that were increasingly being shipped on on larger vessels has shifted back to smaller bulk carriers.

And this trend has appeared to continue despite now the depressed Cape rates.

So you mentioned bauxite becoming a more significant factor in the Cape sized market.

Could you please just elaborate on that a little bit?

I mean historically coal and iron ore has been the dominant cargoes for Capesize vessels.

But we're seeing a shift where bauxite is overtaking coal as the second largest driver of Capesize demand.

This is primarily due to Chinese increasing reliance on important bauxite for aluminum production.

With stricter environmental policies limiting domestic mining, China has actually ramped up its import from guinea and Australia.

And these long haul shipments add to the tonnage miles but they haven't yet offset the weakness in the iron ore and the coal volume.

So looking ahead, what are the expectations of dry bulk rates in the coming weeks?

Do you see a bit of a recovery on the horizon?

Yeah, there's a few potential tailwinds for the market.

As mentioned before, as the Lunar New Year concludes, we anticipate a seasonal increase in coal and iron ore imports.

This is of course particularly relevant for China where steel mills are expected to ramp up production again.

Though growth is expected to slow in 2025, we're still expecting enough recovery in the iron ore demand to see some rebound in freight rates.

We also see a pickup in in grain shipments between week 8 and 24 of the year which could support Panamax and Supermax demands.

And what about the geopolitical situation, we were talking about that quite a lot last year.

Do we expect to see disruptions in the Red Sea due to Houthi attacks.

Again if there is a breakdown of the Gaza ceasefire agreement?

The Houthis have stated that they're standing by to renew attacks on vessels in the Red Sea which could once again disrupt Suez Canal transit.

Even though in the current ceasefire period we have not seen a full recovery.

Like if you look at Clarkson's aggregated transit data that shows that about half of the pre crisis traffic still continues to be rerouted around Africa.

Thank you very much Ben.

Thanks for joining us.

Now we are joined by How Pei, our senior analyst from Shanghai.

How thank you very much for taking the time.

How are you doing?

Good, good, how are you?

Not too bad, not too bad.

So I have a first question which is about the weather.

So what do you think that is the going to be the final impact of the cyclones that we've seen in Australia last week?

I think a lot of market participants was waiting for the quarterly report from Rio Tinto but in fact Brew hasn't really put any estimation on the forecast of the annual production or even quadrant projection yet.

But I think it's estimated that on a solid data source that at least 7 to 8 million tons of delivery shortage did happen last week.

That's not counting the early part of this week.

So I think we give the market like 10 to 12 million tons of delivery lost as a whole for after the two cyclones and all in impact.

I'm still stick with the number.

I think conservatively maybe 10 million tons will be the actual loss.

But I mean in fact it could be like 12 because it comes up with rains and floods and the floods is even still in Australia today and it's not like it's not end yet.

So the calculation doesn't include the impact from miners, it's just include the ships on the sea.

And I think so far the total loss by cyclones of the first two months of the year could be somewhere near 15 million tons already.

And if we view the Australian total shipped like 47.7 million tons of iron ore last Q1, so 15 million tons means more than 30% of loss in the first quarter of the year, which is very significant.

But however if miner rush a bit in the next few weeks, which normally happen and as well Brazil shipped a higher volume compared to the last Q1, the general makeup will bring the total shortage from major miners to somewhere to like 13 to 15%.

But that's still like 13 to 15% lower than the same time of last year so that's a bad estimation I think the circumstances should go worse and.

Looking at the rest of the first quarter what's your view on the coking coal market?

I think coking Co has been in talk like very frequently this year I think first of all after China to re increase and us trying to change a lot of trading rules and commodities flows of the world and we eyed a significant drop on the US export on the prime co market and naturally fob Australian market regained support and rebounded from early February to mid February I think the aftermarket was depend on sustainability of China and India demand I think as well as importers for importers become new suppliers or new producers that could be a positive news for raw materials like iron ore and coking coal but it could be bearish to the steel price because steel exporters either shrink their production or they have to put lower export price to get all the finished steels exported But I think it's neutral, even a slight bullish for the raw material side because more countries going to think about like to import more materials to produce I think that's my view of the coking Co in particular for the prime coal market it's still very tight for the Q1 I mean that's even without thinking of the cyclone or anything delivery impact so I'm quite quite positive on the Q1 price of coking Co I think we're still somewhere in the bottom it has rooms to pick up by the rest of February or.

In March thank you very much Hal.

Now we have Will Addison who's the carbon emissions broker here at fis.

Hi Will, thank you very much for joining us hello David, always a pleasure thank you so let's talk about your area of expertise which is like the carbon market so maybe you can tell us a little bit more about what happened in the carbon market since the beginning of this year it's been a.

Bit of a crazy ride since the end of last year so we've seen quite a lot of volatility in the market Specifically we've seen a 30% hike in the cost of EUAs so from December 18 to January 31 just to look at some figures that 30% hike took us to 84 spot 44 so so a real notable jump there and then following on from that we've had a 10% drop off in the price of EUAs so we now have price of the benchmark contract sitting at around 75 so a real kind of Dogleg action and a lot of volatility in the market.

And can you tell us more about the reasons behind this volatility?

Why are we seeing so much of.

That when we look towards carbon, really we have to look towards the energy complex as a whole.

And specifically the most important relationship that carbon has is with gas.

So when we look towards what's happened in carbon, really we can see a similar story in gas.

So we've had a 47% increase in the TTF, which is the benchmark gas contract.

And essentially the reasons as to why this has occurred are threefold.

So we have weather related drivers of price.

Those being we've had a relatively cool winter this year compared to recent years.

We've also had a phenomenon called Dunkelfloud.

Dunkerfloud, it's a German term.

And essentially what it means is it relates to lower production of renewables.

Okay, so less wind, less sun, more of a reliance on traditional fossil fuels.

And with that we have obviously an increase in gas and therefore an increase in carbon.

Simultaneously, we've had some pretty bullish headlines in the gas space.

So we've had a lot of talk, as is always the case in the gas market, surrounding the conflict in Ukraine.

And towards the end of the year, all of the sentiment was talking around the halt of gas flows going through Ukraine.

How much will this contribute to a tighter market throughout the refueling season now we've seen a sort of sentiment shift in that respect.

So now obviously there's peace talks, there's the US delegation meeting with Russia.

So this is responsible for a lot of volatility in the gas market.

So what do you see in your crystal ball?

So what did the future looks like?

Well, you're right when you say, you know, there's a lot of moving parts in the gas market.

It's almost a fool's game to try and predict with any degree of certainty.

But I think really the three factors which have been responsible for the increase and the three factors which have been responsible for this dogleg action and the drop off in gas, and therefore carbon will be the determinant of the price in the future.

So the weather related drivers on price, as we discussed, we're now starting to see warmer weather.

We're starting to see a return to normal levels of renewable production.

So this is obviously going to be bearish for gas.

There is a kind of dynamic that's occurring from the geopolitical perspective, which is where we have traders are very keen to price in headlines as they come.

So for example, this delegation meeting with Russia caused a sell off.

We saw that in the market.

And there's an element of are people selling the rumor, buying the news?

Are they trying to trade ahead of what's happening?

And actually the realities of what will come through in actuality might be different because although we might see peace in Ukraine, I think Europe is pretty keen to diversify its supply of gas away from Russia at this stage.

And there's also one final sort of configuration in the market which is provided an interesting dynamic this year, which is the 90% storage mandate.

So the European Commission has stipulated that that the countries must have a 90% filled storage by November.

And what this has meant really for the market, in light of, you know, above average storage withdrawals and an overall fears of a tighter market throughout the winter, is that we actually have an inverted summer, winter spread.

So what's typical is obviously in the winter gas prices are higher, but we have summer prices this year higher than gas prices.

And there's been a lot of discussion within the EU of whether these mandates should be alleviated or removed.

We've had big players like Germany, Italy, the Netherlands all protesting this mandate, but the EU so far is holding its nerve.

So any sort of change from a regulatory standpoint in that respect could have a big effect on price.

Thank you very much, Will.

There's been like very interesting and insightful conversation anytime.

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