Capes Climb and Arb opportunity on Iron Ore Spreads

Foreign.

Hello and welcome back to freight up, FIS's freight and quality podcast.

I'm Jess and together with Davide, we will be your hosts as we navigate the seas of freight and commodities.

Hello, I'm glad to be back with all of you after these two weeks.

So it seems that summer has arrived even if the weather is not fully cooperating here in London.

Jess so today we will hear the latest news on Freight from our senior business executive Ben Klang.

Hao Pei from Shanghai will update us on the latest movement in the iron ore market, and Archie Smith will tie this episode up with his take on fuel oil.

But as per usual, let's start with the main macro news of the past two weeks.

So in China, the Kaizen, China general manufacturing PMI unexpectedly fell to 48.3 in May, which is down from about 50.4 in April and missing the forecast of 50.6.

This decline marks the first contraction in the manufacturing sector in eight months.

Meanwhile, consumer prices in China dropped by 0.1% year over year in May and consistent with declines over the previous two months, but slightly better than the expected 0.2% decrease.

In US the unemployment rate remained steady at 4.2% in May for the second consecutive month, in line with market expectations.

The rate has hovered within a tight range of 4 to 4.2% since May 2024, hasn't moved a lot.

In the UK the unemployment rate edged up to 4.6% in the three months to April 2025, rising from 4.5% in the prior period and matching the market forecasts.

This is the highest unemployment level recording since August 2021.

Now let's have a look at the latest movements in the key markets covered.

On the Cape front, things have gone well over the past two weeks.

The C5DC saw a substantial rise going from $15,000 two weeks ago to $19,350 last Tuesday to 24,519 bucks yesterday.

Panamaxs have also seen some mixed results with the P5DC going from $10,869 on the 27th to 9,973 on the 3rd of June to $11,698 yesterday.

Supra MAXs have lost some ground with the S10TC going from $10,271 two weeks ago to 9,583 bucks yesterday.

A little upward movement for the handy sizes as the HS7TC went from $10,567 on the 27th of May to $10,811 on the 10th of June.

Now I'm joined by Ben Klang who will go through our regular freight market update of the last two weeks.

Welcome Ben.

Thank you very much, Jess.

Hope you're well.

So let's start by looking at the market data over the last couple of weeks.

Why don't we just go with Capes first?

Yes, since we Last recorded, the Capesize market has shown a solid rebound in the first week.

27th of May, sentiments improved as iron ore volume from Brazil surged, boosting the paper market.

You know we saw the 5TC index jump 20% week on week to 19,900.

And by the last week the time charter index was pushing to 25,000, the highest level this year.

And this trend kind of filtered down to the FFA market too with gains of around $1,000.

Miners were aggressively fixing tonnage and took advantage of the cheaper iron ore price.

Well, that's a big shift.

How about the FFA market over the last two weeks?

Well, activity cooled a bit entering the week of 26th May due to some public holiday in China.

June contracts dipped initially and then stabilized at 17,750 by Thursday.

Last week there was a renewed strength where we saw the C5 hit $10, C3 reached up to $14 and July contracts climbed to 19,000.

And then on Monday the 9th of July edged up again to 18,900.

So what about the Panamaxes?

They've been a little bit more sluggish, right?

They started slow in the first reporting week with weak transatlantic demands and too much tonic in the Pacific.

But by week two, which was last week, we saw a turnaround thanks to strong grain flow from the East Coast, South America and rising mineral cargoes out of the US East Coast.

We also saw China hit a record for soybean imports with Brazil supplying 80% of that.

This all helped to pull rates back above the kind of five digits.

How about the paper side?

Paper traded in a tight range in the week commencing on 27 May.

June opened at 9,000, dipped briefly, then finished the week at 9,200.

The next week we saw July pick up momentum on the back of the stronger fiscal activities.

It climbed up to 9,900 by Thursday this week.

Cape size corrections dragged the Panamax paper slightly down.

July dipped to 9,500 but then bounced back to 9,650.

How about supermaxs?

Hate to say it, but pretty flat.

Week one was quiet due to holidays.

Paper posted small gains pushing into the kind of five figure mark despite weak Fundamentals.

Too many ships, not enough cargo.

By June 9, negative index light volumes pulled the curve lower again.

July and Q4 contracts slipped to 10,100 and 10,400 respectively.

But not too dramatic.

How about looking a bit more forward?

Where are things headed?

Well, for Capes, a brief pause on iron ore experts is likely to push weekly volumes down 9% to 20.3 million metric tons.

But a rebound is expected next week.

With vessel supply tight.

Rates could climb up again for Panamax.

Volumes are forecast to rise 2% this week and jumped significantly in week 25, driven by East Coast South America grains and stronger coal flows.

Coal volumes alone are set to spike 43%.

With supply pressure easing and demand rising, the Panamax market looks neutral for now, but with a bullish potential.

So to summarize, little bit of a pause on the Capes upside for the Panamaxes and the Supras are just waiting their turn.

Seems like it will be a busy week.

Yeah, like last time, we're digging into the news story that really caught our attention.

The latest data paints a picture of stagnation in the dry bulk shipping market, especially for Capesize vessels.

Secondhand ship sales have dropped sharply, down 48% year on year.

Just 46 Capesize transactions has been recorded in 2025 compared to 89 during the same period last year.

And this is quite interesting because the average age of the vessel being sold has jumped from 12 to 16 years.

At the same time, demolition activity is virtually non existing.

Only two Capesize has been scrapped so far this year.

Meanwhile, new building orders have collapsed to historical lows.

Clarkson's reports a 50% year on year drop in global orders.

You know, mainly driven by weak freight rates, soaring shipyard costs and a host of uncertainties clouding the market.

Oh wow.

Okay, that's really interesting.

Before we start looking at how this might affect the market, can we look at the economics behind it?

I feel like that's something that we don't do very often, just come off a freight masterclass.

And trying to understand why these things happen is now particularly interesting to me.

So would you mind starting with why the collapse in secondhand vessel sales has happened?

Yeah, to put it plainly, when.

When freight rates are weak, ship values fall, buyers push for big discount.

The sellers, especially those with newer, more efficient vessels, don't want to sell at those depressed prices.

What ends up on the market are older ships.

That might be why we're seeing the average age of the sold vessel jump to 16 years.

Okay, and how about the scrapping well.

Shipowners usually scrap vessels with operation cost exceeding potential earnings.

But right now, even though freight rates are low, scrap prices aren't attractive enough to justify it.

And typically when rates are strong, fewer ships are scrapped because even lower, older vessels can.

Can still turn a profit.

But what we're seeing now is unusual low freight rates with minimal scrapping, which keep supply high and continue to kind of put pressure on rates.

So you also mentioned that there was a new build order book.

Last year's was really high because we had strong rates.

Are we just seeing a lagged impact now?

Is that why the decline is so steep?

Exactly, Jess.

When rates are low, owners shy away from ordering new ships.

There are major investments, and when earnings are weak, the risk reward just doesn't stack up.

Add to that rising shipyards cost and longer delivery times, well, it's a tough sell.

And as you said last year, we saw the biggest order book since 2008, and many of those vessels are still being delivered and are scheduled to hit the market soon.

So we're not even feeling the full impact yet.

All right, so that's kind of the theory.

What are the more macro factors contributing to this specific scenario?

Well, we're in a unique kind of period of uncertainty that is not often seen in freight markets, and that's showing up in the.

In the kind of flattening of FFA prices.

Less volatile, more of a wait and see mood.

Geopolitics are a big part of this.

Trump's escalating tariff policies, renewed US Sanctions on China Lake tonnage.

It's all creating caution in the market.

Then there's the environmental side.

New fuel regulations are coming, but it's still unclear which fuels or technologies that would be both cost efficient and compliant.

I mean, in general, ships can't easily switch fuel types, so making the wrong call now could kind of lock an owner into really expensive mistakes.

That uncertainty is another reason many are choosing to kind of delay decision.

All right, so basically, the market's stuck.

We've got low scrapping, weak secondhand sales that are keeping the supply high.

And then there's a fear of this regulation and geopolitics that's stopping new investment.

I'll personally be watching for any movement on China, stimulus, scrap prices, US Trade policies, anything that might spark a renewed sense of volatility.

Thank you for the insights, Ben.

Thank you very much, Jess.

All right, and now we are joined by our senior analyst from Shanghai, Hao Pei, who's here to do his regular segment on the Ferris market.

Hi, Hao.

So Let me start by asking you against the backdrop of this tight iron ore supply and the demand balance and shrinking steel mill profits why has MB65P62 compressed to a two year low?

It's a structural looseness on the supply side on the 65 in particular and the shipments of the high grades including VRBF and and ILCJ and concentrates from South Brazil and TSN sources so they all have significantly increased and there is no rainy or supply disruption at all through the year and coupled with accumulation of these concentrate levels in China and India so it all enhanced this efficiency of high grade ore supply.

Well, in fact the fines mid grade are actually a tight supply and even few brands were structured short in China.

So I think that caused the historical level narrow on the spread of 65 and 62 and also impact of macro and trade policies.

And since there are always concerns about overseas markets, about trying to export to reefs have triggered short term export rush expectation et cetera.

But those are more on the rather low value added still and indirectly driving demand for low grades and mid grade iron ores instead of premium iron ore.

So I think those are all factors to squeeze those the spread into extreme low levels.

But I think the last low level was seen on September 2023 and I think that there is attractiveness of the low spread interior level.

We have seen a lot of 65 trade during this weekend last week.

So I think a lot of times a lot of investors are focusing on the opportunities of this level.

I think the loss is limited while the gain is very promising at this point And I think if there is marginal improvement for example steel margins and higher few demands in exports they all could support those the spread to recover a bit.

And then moving on to coking coal prices they've rebounded quite sharply last week.

What were the driving factors and are they sustainable?

How will subsequent price trends be affected by by the supply, demand fundamentals and policy variables?

Yeah, I think the coke and co market is very interesting.

There is like quite for two months, maybe a quarter and when there is news it all happened in two days.

I think the fast lift of coking co market it's either FOB Australia Cocain Co as well as DCE cocaine co at a day or two was contributed by a lot of sudden came up news including the change of Mongolia PM which raised market concerns about adjustments to co export policies because Mongolia used to guarantee almost double the size of export in 2025 compared with 2024.

But I personally doubt that value is reasonable.

So now market is down at that level so they're probably going to fix the outlook of the total export this year say like 20 to 30% increase compared with last year no matter what change happen they all actually limit the supply from Mongolia side but there is no materialized documents or anything happened yet.

There is also production reduction rumors in Shanxi China there's actually the rumor became true it's news right and there is production caught on that province so I think the market read as there will be a general reduction in different provinces in China it's just a matter of time and I think in addition we mentioned that DTE Cokinko futures open interest has created historical high level opaque There is far not that much holds on the market either physical and futures so some of the speculation funds they start to take out at extreme low level Plus I think it's good point for them to take that out and for some of the international traders theorists think about even ship some of the domestic prime calls from China out of China or on the fourth area of China it still could be much much cheaper than import for any of the seaborne resource so which also pull back the difference between the CFR Australian coking coal and FOB coking co so I think that's one reason that we saw a slight direction of FOB alternating coking coal however CFI growth and domestic price growth I think the fast growth is probably not sustainable because the static balance is still a strong supply versus a weak demand but the extremely low level is not sustainable either at this level well.

Thank you very much Hal thank you.

Jaz.

And now back in the booth with us, Archie's mate Archie three thank you very much for joining us thank you for having me as always a big pleasure.

Yes, pleasure is all mine.

Let's start talking about surprise, surprise, fuel oil and crude.

So like crude lately has been climbing a little bit gradually but it's been climbing so it's been also like a little bit range bound in its prices.

So like what are the factors behind this kind of like activity?

Yeah so we saw a little bit of a climb yesterday.

It's been gradually sort of ticking up this week I think that's just sort of people looking ahead or people looking currently at the U S China talks that are being held sort of ongoing.

I think the general consensus that is positive outcomes so far I think there's still a few more things that need to be agreed.

Yeah of course like it's, it's a very complex issue but like the newsletter that we're seeing so far Is that here in London there seems to be some sort of a framework agreement at least.

Exactly.

And that's, that's certainly sort of supported prices.

Yeah, but yeah, as I said it's been quite range around sort of between 60, 65 and, and the, the higher end of 67.

Okay.

From a technical point of view our sort of in house analyst here, Ed, he's very good.

He, he seems to think that it's actually technically a little bit overbought at the minute the crude and then we could see a pullback back down to sort of the lower 65 levels.

Right.

So it'll be interesting to see how that pans out.

If I'm sort of zooming in and looking specifically this morning, it's been super, super sideways, not really moving.

I think people are looking ahead this afternoon we've got US CPI data and EIA crude inventories data as well.

So we'll sort of see where they come in and that, that could maybe add a bit of direction to the market.

But yeah, certainly today has been pretty directionless, pretty spineless.

Is anything coming from the OPEX side?

Have you seen like any.

Yeah, that's mostly, mostly priced in now.

Okay.

I'd say so there was the initial drop sort of last month down to the lower end of the $60 sort of range because it was sort of announced that they're going to really push for this increased output.

I think the reasoning behind that is I think Saudi just want more market share so they're quite happy with pumping out more oil and decreasing prices just for, for the sake of gaining that market share.

But yeah, that, that's all sort of been and gone now.

I think it's very much priced in.

Yeah we did see a massive came off pretty aggressively when that initial announcement came out and then obviously since the meeting.

Yeah Bill and gone were sort of looking more now us, China and et cetera, et cetera.

Yeah.

So the focus is moving there.

Yeah.

Until OPEC come in again with another crazy announcement and then obviously it all shifts.

But yeah, I'd say if we're looking sort of week to week basis.

Yeah.

The common topic over these first six months of 2025 has been like uncertainty and then there's always I wait and see.

Wait and see.

Wait and see for sure.

So across different markets.

Yeah.

And when it comes to the more like fuel oil, what's your view?

Yeah, happening.

Well there's been a few things going on.

I'll look a little bit at the same 3:80 spread.

So the high sulfur Singapore fuel or the spreads.

I mean after trading up to pretty, pretty aggressively high levels in the front, we've actually seen those massively cooling off recently.

I mean yesterday there wasn't really many buyers in the market for like the July Org and all set spreads.

We're hearing from the market.

This is just the reason these spreads are cooling off of it is because of a bit of like a lack of demand in the physical market.

And that's sort of being reflected now in the paper market.

We'll see you know where these get to.

You know it could start getting to sort of level where it's looking maybe cheaper and then we see it back up.

Single point five spreads as well.

They've been more steady eddy in the front end of the curve.

We've seen quite a lot of action in back end actually sort of like second half 20, 26.

Quite a lot of people sort of buying spreads back there.

I'd say more of like a speculative play but you know, maybe from that perspective.

Yeah, I'd say yeah, yeah.

More respective play it seems but.

But maybe there is some sort of.

Yeah, hedging or physical tide needs in the back end of the curve there.

But the front end is very much sort of yeah, five and a half level on the.

On the July org.

Not really moving much.

I mean the volumes have been quite high though and then I think sort of ongoing as well with the European low sulfur complex is still quite strong in comparison to the single point five complex.

The zero point five east west which is the difference in the European very low sulfur fuel on Singapore very low sulfur fuel law, although it is higher than where it was.

I mean we got to like, like 29 which is like historically very low.

It's now up to sort of 33 levels.

32, 33.

So yeah, a little bit higher but still historically much lower than where that east west arbitrage normally is.

So yeah, it'd be interesting to see if this sort of this European strength persists against the Singapore counterpart.

Thank you very much for joining us, Atum.

Cheers.

Thank you for having me, Davide.

And that's it for this week.

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