Dry freight could recover next year: report

Dry freight could recover next year: report
Published: 27 April 2010

A recent report by Bank of America Merrill Lynch shows that dry freight could recover next year.

Now the economy and commodity prices are finding support and cyclical commodities like iron ore, copper and crude oil are strengthening, the relative weakness of dry bulk shipping prices is somewhat surprising according to the bank. Growth in global industrial production is rebounding at the strongest rate since 2000 but the freight market is still lagging. This is because after decades of minimal new dry bulk carrier supply, fleet additions have picked up strongly and the total bulk carrier fleet is expanding rapidly.

Merrill Lynch believe that dry freight prices have troughed and should find some support going forward, benefiting from the global cyclical recovery. While the potential for the market to spike in near-term is low, due to the overcapacity of ships, the outlook for demand is very positive. The global iron ore market is tight and seaborne demand is growing rapidly, particularly from China. Moreover, the global coal markets are starting to show signs of tightness with AP14 coal prices rebounding to 18 month highs. Merrill Lynch see some upside to dry freight in the medium-term, once the oversupply of ships is absorbed in 2011. A strengthening global economic cycle and unsaturated demand for raw materials in Ems is stimulating global seaborne iron ore and coal trade. In aggregate, total trade in dry bulks could be increased by 7% this year. This will bring demand back to record highs, completely compensating for last year’s demand destruction.

Merill Lynch do not believe in a spiking market due to the abundant supply outlook which should keep freight prices on a gradual appreciation trend. However, the bank believes that the term structure of the freight market will remand in backwardation. Implied vol on dry freight contracts remain relatively high, particularly at the very front end of the vol term structure. Hence, overwriting options over a long freight position could generate a stream of income to complement exposure to flat prices.