Opportunities Along The FFA Curve

During the past 7 years, the Capesize, Panamax and Supramax indexes all settled higher in Q3 than Q2. And in each year the highest quarterly average was in either Q3 or Q4.

As rates have surprised to the upside throughout the past 12 months, the FFA curve has generally been in a state of backwardation as the market expected the prompt tightness would soon abate. The Capesize forward curve is pricing the normal state of affairs, with Q3 being priced at a premium to Q2. However the Panamax & Supramax forward curves retain notable backwardation with Q3 at a discount to Q2.

Perhaps this year will buck the trend of the past 7 as an especially tight market eases throughout the year. Alternatively, the later contracts might be undervalued and will lift as the market tightness continues. A Q3 rally in the Capesize index is usually a big enough tide to lift all boats.

Looking at the fundamentals, the downgraded Brazilian soybean crop alongside an expected record Safrinha corn crop will likely increase Panamax demand in Q3 & Q4 much more than Q2. According to the latest USDA numbers Brazilian soybean exports will be up 9 million tonnes YoY, as about 2 thirds ship in Q1 & Q2, first half shipments may rise by 6 million tonnes YoY. Whereas corn exports are forecasted to increase by a huge 22 million tonnes, and as around 85% is shipped in Q3 & Q4, second half shipments could rise by nearly 19 million tonnes. The second half of the year is seeing more growth than the first.

Panamax coal volumes are usually strongest in Q3 or Q4, and looking at the current energy crisis, coal will be in strong demand come next winter, with exporters deep in the money. Outside of grains and coal, other Panamax commodities' exports typically peak in the second half of the year, with this year likely no different.

Whilst it's true that Panamax tonne-miles often peak in Q2, total dry bulk tonne-miles typically peak in Q3 or Q4. Vessel class switching dynamics means that Capesize strength in the second half of the year generally translates into strength for the smaller vessels. This explains the seasonality of the whole market.

The continual FFA backwardation during 2021 can be attributed to a very tight market which continually surprised most market participants. However now, given we know we are in a broadly tight market environment, it is interesting to see this backwardation persist for the smaller vessel classes. Given the history of the Q2-Q3 spread alongside the current fundamentals, it appears as though Q3 and Q4 are undervalued on a relative basis for the sub-Capesize segments.

The opinions expressed herein are the author's and not necessarily those of The Xinde Marine News.