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DAILY BLOG POST – TUESDAY

Brief Thoughts on The Dry Bulk Roller Coaster

By James Catlin – November 9, 2021

It started off good. The possibility of a super cycle was proclaimed and capesize rates promptly doubled to decade plus highs. While this very short-term move did add to the optimism and may have even converted a few naysayers which have now likely doubled back as rates have retreated, it represented very little relevance to the long-term fundamental market outlook.

Massive rate swings to the upside have been regularly observed during long-term bear market trends and vice-versa. Looking back at the early 2000s we witnessed capesize rates (the most volatile class) routinely post new highs only to fall back to nearly half that level (sometimes as much as one-quarter), before going on to post even higher highs.

The one useful thing this latest rally did was to show how tight the market is becoming. Given the underlying fundamentals that fueled this move (which were unimpressive), this level of rate volatility would not be possible without a certain degree of base supporting metrics. Those improving supporting metrics not only look to provide a more stable and higher rate floor but would also lead to outsized moves to the upside once slightly bullish factors appear.

The best way to judge the market is not by observing seasonality or short-term shifts, but on a YoY comparison basis, and in this regard 2021 is clearly making progress. Let’s not forget that the recent plunge from $83k/day to $30k/day, which is making headlines, still represents spot rates seen only once in 2019’s brief highs, with 2020 only briefly breaking that mark twice, peaking at $32k/day and $33k/day.

Perspective is helpful when discussing a 3-5-year forecast, so on that note let’s also remember that rates are far more responsive to idiosyncratic short-term shocks while structural market fundamentals typically define the long-term trend. The move from $40k/day up to $80k/day and back down to $30k/day would absolutely indicate a short-term shock. In fact, I would suggest the correct question to ask for this instance would be why we shot up to $80k/day so quickly, not why we fell back

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