The dry bulk derivatives market has been active given the massive volatility being experienced in segments such as the capesizes, which reached the highest spot average in more than a decade. In the year to date, overall dry forward freight agreements reached almost 2m lots, up from 1.25m lots in the same period last year, according to Baltic Exchange data. One lot equals 1,000 tonnes. Panamax derivatives trading reached almost 1m lots so far this year, a gain of 62% from the same period in 2020, while capesize trading reached 672,519 lots, up 42%.

According to Freight Investor Services senior dry FFA broker Kris Payne, the steep backwardation in capesizes suggests “a big correction is looming. All the uncertainty over when and how big that correction will be is exactly why the capesize market is currently so volatile. In my humble opinion, with the current global energy crisis, coal demand will only increase, and with winter on the horizon, this only boosts long-haul trade and supports the panamax market as well,” he said. “The current backwardation, in my opinion, is too steep as we can only see a strong end to the year with the seasonal iron ore shipments and the additional coal demand. The entire dry bulk shipping complex is currently supported from the bottom up and looks set to stay that way for the near future at least.”

Spot capesize rates dipped below $80,000 per day this week, closing at an average of $70,181 per day on the Baltic Exchange on Thursday. That compares with a high of $86,953 on October 7 for the 180,000 dwt assessment. Arrow research said an easing of spot rates was expected given a decline in iron ore from Brazil over the coming months. The desperate need for coal amid an energy crisis did little to offset the sudden drop in prompt iron ore, although congestion remained significant, said Fearnleys in a note. FFAs have largely responded to the recent decline in the spot capesize market, with values for the fourth quarter dipping through the week. As of October 13, the fourth quarter was at $52,300, according to GFI broker figures. That compares with $54,500 in the previous session and $61,500 at the start of the week. Similarly, the first quarter shed value, though not to the same extent, closing out at $27,250, from $27,500 and $29,500, respectively, GFI figures show.

“There is a battle going on in the dry bulk market, and the outcome will probably define the direction of rates over the next several months,” Breakwave Advisors said in a note. While the considerable increase in freight costs is hurting traders and producers, commodity demand, especially for coal, is extremely strong. When combined with steady flows in iron ore and “ongoing bottlenecks on the supply side, makes it hard for market participants to turn negative on rates, despite the mean reversion character of freight and the upcoming seasonal weakness during the winter”, the US-based exchange traded fund said. It added that it remained in the camp of those expecting a gradual softening in rates, and it believed the futures were “rightly positioned” for such an event. However, the extent of such a decline was highly debatable. “We sense an urgency from market participants to hedge winter freight,” it said. “At the same time, short-term spot fundamentals, especially for capesizes, don’t look particularly promising, and history suggests that when spot prices drop, futures follow. Yet, it will be the rate of decent that will shape the futures curve.” It expects volatility to remain high through the rest of the year.

Jefferies also notes volatility in the market, though it expects strong rates to remain with higher averages in 2022 compared to this year, which saw the highest rates for all dry bulk segments in more than a decade.