• Panic Bid in Freight Sends Spot Rates Flying as Uncertainty Skyrockets – It took only a brief press release from the Chinese government to shift sentiment and push both dry bulk freight futures and spot rates higher as market participants grappled with uncertainty. The prospect of port fees on US-linked ships, a policy echoing a measure the United States is anticipated to implement, has prompted many dry bulk players to seek clarity, in the process pushing freight costs higher. Although the US shipping industry has limited direct exposure to dry bulk, the policy appears to touch a broad spectrum of potential linkages, including trading, financing, and ownership. Consequently, in the absence of clear guidance, freight rates have moved along the path of least resistance, which traditionally has been up, amid great uncertainty. The port-fee policy is scheduled for implementation on October 14, and market participants are awaiting details on its scope and implications. For the moment, the overall commodity shipping market remains confused. While the potential impact could range from minimal to substantial, the fundamental balance of cargoes versus ships has not materially changed. Accordingly, any effects are likely to be short-lived, given China’s significant role in dry-bulk trade and its influence on freight costs, independent of policy shifts and trade frictions.
• Port Fees Correspond to Higher Freight, but Who Pays Is What Matters – Freight mechanics remain inherently complex, as different stakeholders bear distinct components of the transport cost. Given the predominantly “net” nature of dry-bulk freight, especially in the context of freight futures, an increase in gross freight prices can translate into a disproportionately larger rise in net freight once a fixed deduction is applied. Yet the dynamics are not straightforward. Key questions arise: Will charterers pivot to non–US-linked ships to avoid port fees? If so, are enough non–US-linked vessels available to execute such a strategy? How will the substantial influence of US-linked trading houses and commodity traders, which control a large portion of the global dry-bulk fleet, shape outcomes? If a two-tier market emerges while these policies remain in place, what is the true price of net freight on a given route? Will there be an inclusive versus an exclusive freight rate, akin to the EU’s carbon-adjustment mechanism for tankers? If both concepts are possible, which would prevail, and would such a disruption prove durable? There are no definitive answers at present. History suggests that rates tend to converge toward the supply–demand balance over time, similar to what occurred in the tanker sector. In our view, it is the compressed lead time to implementation (less than a week), rather than to a fundamentally higher equilibrium for the broader dry-bulk market versus a week ago that has pushed rates sharply higher, yet shipping is always full of such impressive, unexpected changes.
• Our Long-term View – The last few years have been characterized by increased geopolitical uncertainty. Going forward, we expect such events to continue to affect global trade and have a meaningful impact on effective vessel supply. Combined with the potential for a multi-year cyclical rebound in China’s economic activity following the recent economic turmoil, dry bulk shipping should experience higher volatility on top of a secular tightness driven by stable bulk commodity demand and a slower fleet growth owing to a relatively low orderbook.
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