Missing the Spike: Downside of Forward Cover

In the past five to six months, a steady rise in dry cargo freight rates, marked by Capesize rates exceeding even the most optimistic expectations, has created quite a stir in time charter and spot markets. The increase, while leveling off somewhat in the last three weeks, gives no indication of subsiding. Raw materials are in demand, industrialized countries’ stocks are low, and economic growth continues. For some, turnover in the last quarter is enough to cancel out loss-making that may have been suffered in the difficult first half.

Nevertheless, the question comes to mind: to what extent have some shipping companies, inclined toward more continuous rates of return and longer charters, been left out in the cold? For example, Anangel American Shipping Ltd., a shipping wonder dedicated solely to dry cargo (with the exception of a single tanker out of a fleet of 21 vessels) maintained forward cover on 97.5% of its fleet this year. That means it cannot take advantage of higher rates until April 1995 when the first of its four Capesize charters expires.

That’s why, despite higher rates, Anangel’s profits, in its most recently reported quarter, fell by 50% compared to the corresponding period in 1993, and its equity stocks continue to sell at a 10% discount to net asset value ($15.00/share on December 2).

This is only an excerpt of Missing the Spike: Downside of Forward Cover

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