The dry bulk market is on an upward trend, but most are unable or hesitating to predict how high and how long will the market move. This is where the FFAs are quite handy. In its latest weekly report, shipbroker Allied Shipbroking said that “at the close of the 1H ’21, most in the dry bulk sector are sharing a fair bit of optimism for the future. With core indicators such as period and spot TC figures (along with the paper market), as well as asset prices holding at relatively bullish levels, the market seems ready to reach new highs. As long as the “music” continues many will be looking to guess the maximum that can be reached in the current status quo. However, the very definition of a maximum comes hand-in-hand with strategic decisions, which can differ across different risk profiles, time horizons, return targets, etc”.

According to Allied’s Research Analyst, Mr. Thomas Chasapis, “an important point when referring to market conditions is that even in a “strong” market, uncertainty/risk is still present. Uncertainty is not limited to how volatile a market is or to the fact that inevitably at some point in the future there will be a negative correction. Many models and strategies are well equipped to capture short term momentum and fundamental dynamics; however, they fail to fully capture where we stand within the longer-term business cycle, a risk that can potentially derail any strategy. It has been pointed out that current asset price levels are seemingly lagging their respective freight returns. Given the remarkable gains in realized earnings, many have adopted this view despite the strong rise in prices, with current gains in earnings easily covering this mark up in prices while still leaving “room” for further gains”.

Chasapis added that “this is a surprising trend given that in the recent past we have tended to see a preemptive rise in asset prices before earnings have had the chance to reach respective levels. Getting back to the freight market, many are still “hesitant” to make longer-term decisions, in fear that they may lose out on further gains to be noted. Let us take the Capesize market, where period TC figures for 1-year and 3-years are currently at US$ 30,500 and US$ 24,250 per day respectively. Is there a chance to both secure this rate and not completely lose out on any future upward potential? Through FFA contracts, you can “hedge” in a way the commitment to a long TC, but not the downside risks involved. Seeing the latest closing figures in forward contracts of the different hedging periods that are in line with the referred period TC ranges, the return gap (between period TC and FFA) is relatively tight (otherwise there would be arbitrage opportunities), with FFA markets though, seemingly at a small “discount” with the swap base being in the region of US$ 28,000/day for the 1-year period (utilizing the 4 forward quarters) and in the region/excess of US 23,000/day for the 3-year period (utilizing 2 forward quarters and 3 forward calendar years)”, Allied’s analyst said.

“A long position in FFA contracts can let you secure the upward return, currently on a slightly lower swap base at the same time, as well as an opportunity “window” to exit this strategy and change your position so as to minimize losses if things go severely wrong.

The ab

Upward Trend

The dry bulk market is on an upward trend, but most are unable or hesitating to predict how high and how long will the market move. This is where the FFAs are quite handy. In its latest weekly report, shipbroker Allied Shipbroking said that “at the close of the 1H ’21, most in the dry bulk sector are sharing a fair bit of optimism for the future. With core indicators such as period and spot TC figures (along with the paper market), as well as asset prices holding at relatively bullish levels, the market seems ready to reach new highs. As long as the “music” continues many will be looking to guess the maximum that can be reached in the current status quo. However, the very definition of a maximum comes hand-in-hand with strategic decisions, which can differ across different risk profiles, time horizons, return targets, etc”.

According to Allied’s Research Analyst, Mr. Thomas Chasapis, “an important point when referring to market conditions is that even in a “strong” market, uncertainty/risk is still present. Uncertainty is not limited to how volatile a market is or to the fact that inevitably at some point in the future there will be a negative correction. Many models and strategies are well equipped to capture short term momentum and fundamental dynamics; however, they fail to fully capture where we stand within the longer-term business cycle, a risk that can potentially derail any strategy. It has been pointed out that current asset price levels are seemingly lagging their respective freight returns. Given the remarkable gains in realized earnings, many have adopted this view despite the strong rise in prices, with current gains in earnings easily covering this mark up in prices while still leaving “room” for further gains”.

Chasapis added that “this is a surprising trend given that in the recent past we have tended to see a preemptive rise in asset prices before earnings have had the chance to reach respective levels. Getting back to the freight market, many are still “hesitant” to make longer-term decisions, in fear that they may lose out on further gains to be noted. Let us take the Capesize market, where period TC figures for 1-year and 3-years are currently at US$ 30,500 and US$ 24,250 per day respectively. Is there a chance to both secure this rate and not completely lose out on any future upward potential? Through FFA contracts, you can “hedge” in a way the commitment to a long TC, but not the downside risks involved. Seeing the latest closing figures in forward contracts of the different hedging periods that are in line with the referred period TC ranges, the return gap (between period TC and FFA) is relatively tight (otherwise there would be arbitrage opportunities), with FFA markets though, seemingly at a small “discount” with the swap base being in the region of US$ 28,000/day for the 1-year period (utilizing the 4 forward quarters) and in the region/excess of US 23,000/day for the 3-year period (utilizing 2 forward quarters and 3 forward calendar years)”, Allied’s analyst said.

“A long position in FFA contracts can let you secure the upward return, currently on a slightly lower swap base at the same time, as well as an opportunity “window” to exit this strategy and change your position so as to minimize losses if things go severely wrong.

The above is just an example of how you can utilize current conditions to build similar returns at much lower risk levels. A similar approach can also be taken for asset purchases. Taking the opportunity to restructure the fleet using the current capital opportunities and high earnings, to grow (in size) and modernize your fleet, without taking excessive risk of any sudden negative market shifts. If we were fully aware of exactly where we were within the business cycle and we had full hindsight of the duration of this rally, it would be easier to suggest short-term strategies for higher returns. With so many unknowns still at play, it would be more prudent to invest with as limited exposure to risk as possible” Chasapis concluded.

Marex Media

ove is just an example of how you can utilize current conditions to build similar returns at much lower risk levels. A similar approach can also be taken for asset purchases. Taking the opportunity to restructure the fleet using the current capital opportunities and high earnings, to grow (in size) and modernize your fleet, without taking excessive risk of any sudden negative market shifts. If we were fully aware of exactly where we were within the business cycle and we had full hindsight of the duration of this rally, it would be easier to suggest short-term strategies for higher returns. With so many unknowns still at play, it would be more prudent to invest with as limited exposure to risk as possible” Chasapis concluded.

Marex Media