The freight derivatives for capesize bulk carriers is on fire as spot rates in the physical market near $70,000 per day.

Greg McAndrew, executive director of derivatives at shipbroker Simpson Spence Young, said the rally in the market for freight forward agreements (FFAs) comes as a direct result of what is happening in the physical market.

"The latest large move up started in the middle of last week, when both physical basins firmed physically. This, combined with congestion issues, was enough to spark a rally in FFA," he told TradeWinds.

"In turn, those that were short the market had to stop out, pushing the FFA market higher."

Paper market

Prompt contracts leapt up on Monday and kept going on Tuesday.

Bids for October contracts were at $60,000 per day as of 3.30pm in London (14.30 GMT), up by $4,500 since the market opened.

The contract has risen by around $9,500 since Friday's close, based on current bidding.

Fourth-quarter contracts traded at $50,500 per day mid-afternoon in London, after closing on Monday at $46,702 per day.

McAndrew thinks the derivatives market has potential to go even higher.

"The [forward] curve is also steeply backwardated, notably from December onwards," he continued.

"Some of this has been eroded in the last two days of trading, but if the [Baltic capesize] index remains at these levels or pushes further (which seems likely) then further gains are likely on the FFA curve."

Implied freight rates for each quarter next year are all above $24,000 per day, based on settlements on Monday. Bidding was over $25,000 on Tuesday for first-quarter and second-quarter FFAs.

Derivatives specialist Freight Investor Services (FIS) said in a market report that contracts for next year "lifted significantly as good volume changed hands" on Monday.

Paper for the calendar year 2022 settled $1,153 higher on Monday at $26,721 per day.

Physical market

Seanergy's 171,300-dwt capesize Gloriuship (built 2004) takes on iron ore. Photo: Seanergy Maritime Holdings

Average capesize spot rates have reached their highest level since December 2009.

Baltic Exchange panellists added an extra $5,983 to the capesize 5TC assessment, the weighted average of spot rates on five key routes, which was assessed at $69,013 per day on Tuesday.

Available tonnage is short in the Atlantic and Pacific basins due to port congestion, especially in China, weather-related disruption and changes in trade flows for commodities such as coal.

Rates in the Atlantic are holding steady as owners prefer to keep their ships in the Pacific instead of ballasting west of Singapore, according to FIS' daily market report on Tuesday.

"The Pacific market saw healthy coal shipping volumes coming from South Korean trade participants, though there were some market concerns over iron ore demand after the Golden Week holidays in China," FIS said.

Demand for iron ore is being kept firm by restocking activity in China.

A huge $4 was added to the Baltic Exchange's Brazil-China benchmark iron ore voyage on Tuesday, which was assessed at $43.20 per tonne.

There was word in the market that a Chinese-controlled capesize was fixed at $44.80 per tonne, FIS said on Monday.

The Western Australia-China benchmark route was assessed $2.25 higher at $21.818 per tonne.