Despite the global economic recovery that is keeping shipping demand high in Asia, charter rates for large bulk carriers have been fluctuating wildly, driven by investors trading contracts for future carrier charter rates, or freight futures.
Similar to what is happening in the commodities markets, investor money is dictating the shipping market for iron ore, coal and other resources. “It is rare that prices fluctuate so rapidly,” said a ship broker.
Price movements in the futures are also causing spot prices for shipping to move erratically.
Charter rates for carriers have been on a roller coaster ride since April. Rates for benchmark capesize vessels with a capacity of about 180,000 tons on key routes averaged $7,050 a day on April 5. They nearly tripled to $20,810 on May 14 then fell sharply to $10,583 on May 30.
The global economy has been cruising along since 2017 on the back of domestic infrastructure investments in China and consumer spending in the U.S. and Europe. This has strengthened demand for sea transport, which should keep charter rates high and on an even keel. Also, there are no shifts in Chinese steel material production or resource imports, which affect the volume of seaborne trade.
Hence, the only other explanation for the fluctuating charter rates lies with speculative investors.
Some experts pointed out that April’s surge in freight rates was triggered by increased freight movement of Brazilian iron ore. Rates went up as mine repairs in the country ceased, sending Brazilian resource major Vale and others rushing to charter bulk carriers for shipping to China.
But other market watchers observed that supply and demand cannot explain the wild rate movements, with one shipping broker fingering speculators looking for new markets in which to invest.
Speculators are now pouring money into freight futures, which are traded on the Singapore Exchange and other bourses. The futures contracts allow shipping and resource companies to hedge against freight rate volatility. But speculators are now actively trading the futures, which increases volatility and allows profits to be taken from price movements.
Trading volume of freight futures on the Singapore bourse marked nearly a 50% jump from a year ago in the January-May period. Now that they have become another financial investment product, the futures are likely to continue their wild ride irrespective of actual supply and demand.
Chinese demand for iron ore remains strong even when freight rates fluctuate. And after regulations imposed on steelmakers last fall were nearly lifted in March, steel production began to rise.
There are concerns that the slowing of infrastructure projects in China may affect steel demand, but the supply-demand balance has not changed much, since production capacities have been cut.
“Seesawing bulk carrier freight rates will rise slowly, as long as they are supported by strong demand for iron ore,” said Miyamoto Noriko, managing corporate officer of Nippon Yusen.
That said, uncertainties about the global economy, such as the U.S.-China trade tiff, have made it difficult to predict where investors in Asia will put their money. This applies to freight futures, causing market participants to continue fretting over speculative investors.