FFA market more positive for the first quarter of 2026, despite downside risks to fundamentals and strong fleet growth next year

The dry bulk freight market has been unexpectedly strong in recent weeks, a sharp contrast to the first half of the year, notes MSI’s HORIZON Dry Bulk December report.

A key feature of this strength has been the outperformance of the Capesize market, which has benefited from surging Guinean bauxite exports (up 35% yoy for Jan-Aug). Chinese iron ore demand has also played a major role, with import volumes recovering from a weak first half to the year.

This has underpinned solid Brazilian and Australian exports, which are expected to remain robust as China moves into a restocking phase. Notably, the iron content of seaborne traded ore has slipped, aligned with China’s high blast furnace output; this has been positive for recent volumes, but this leveraging support may unwind once higher-grade Simandou material becomes available.

The first loading of Simandou ore this month generated significant interest; though MSI remains cautious on its near-term impact and a meaningful disruption to trade flows is unlikely until later next year. For now, China’s ongoing stockpiling of iron ore and bauxite remains the dominant force supporting Capesize demand through year-end.

“While near-term fundamentals are positive, much of the current strength is being driven by temporary factors, namely Chinese stockpiling of iron ore, bauxite and soybeans,” says MSI Analyst James Benali.“Support will unwind as we move into early next year, when the seasonal Lunar New Year import demand slowdown could be prolonged by China’s elevated inventories.”

At the same time, the fleet will continue to expand, with a total of 35 Mn Dwt expected to be delivered in 2025, followed by a further 42 Mn Dwt scheduled for 2026. Of particular concern is that this large orderbook poses a significant risk for the Panamax segment, with around 16 Mn Dwt slated for delivery.

When combined with the weak fundamentals of coal trade, the segment faces a risk of oversupply and downward pressure on earnings. The Handymax segment also faces oversupply risks, though to a lesser extent, with an orderbook of 12 Mn Dwt.

Stronger fleet growth, combined with softer cargo volumes once stockpiling unwinds, will put meaningful pressure on earnings and asset prices. As a result, we expect rates to come under sustained downward pressure from Q1 and Q2 2026.

This also helps explain MSI’s cautious earnings outlook, despite the recent lift in sentiment seen in the FFA market, particularly for Capesize vessels, adds Benali.

“The Q2-26 FFA contract has climbed steadily from around $19,200/day in July to $23,700/day in November, a 23% increase, reflecting a notable improvement in forward sentiment that is not fully justified by developments in MSI’s analysis of the underlying market fundamentals.”