A New Year and a Return to Normality?

By Ulf Bergman

 

During the earlier parts of the eventful year that has just been consigned to our rearview mirrors, there was an expectation that the shipping and commodity markets would return to something resembling normality during 2022. However, as the months passed by and the end of the year beckoned, such assumptions became increasingly challenging to entertain in the wake of rapidly rising Omicron infection rates and new restrictions in many parts of the world. A combination of high demand for dry bulk commodities and goods, at the expense of services and transportation fuels, and port congestions during the pandemic sent freight rates in the dry bulk and container shipping sectors soaring. In contrast, tanker rates languished below breakeven levels, as air and road transportation failed to recover to pre-pandemic levels. Against this background, there had been a widespread expectation of a reversal of fortunes as the world started to emerge from the clutches of the coronavirus. 

However, the advent of the latest and more contagious variant of the Covid-19 virus has scuppered much of the hopes of a rapid return to normality during the current year. If anything, it points towards a variation of the theme of the last two years. While the new mutation spreads more quickly than previous incarnations, it appears to cause fewer and less severe complications and allow governments to impose less draconian measures to control it. In addition, the appetite and fiscal room for new full-scale lockdowns are vanishing in many countries. Hence, the disruptions to the global economy caused by the Omicron variant should be limited compared to what took place during the earlier parts of the pandemic. On the other hand, China’s zero-tolerance policy for Covid-infections is likely to continue to cause disruptions to the flow of goods and commodities, with port terminals closures to control the spread of the virus. Hence, congestion in and around ports in the world’s largest importer of dry bulk commodities will likely remain a theme for the new year.

The year has started with weaker than expected economic data released in the US, as the latest virus outbreak is adding some headwinds to the recovery for the world’s largest economy. During December, the number of new jobs created in the US fell well short of economists’ anticipations, with only 199,000 of the expected 450,000 new nonfarm jobs delivered. The disappointing reading followed a greater than expected decline in the Institute for Supply Management’s gauge of services activity for December. The index retreated 7.1 points from November’s record reading of 69.1, with economists expecting a more modest two-point decline. Still, despite the disappointing data, the US economy is showing considerable strength with falling unemployment and the activity in the service sector well above pre-pandemic levels.

Across the Pacific, the Chinese Caixin Manufacturing Purchasing Managers’ Index edged back into the expansionary territory with a 50.9 reading, which was better than expected by analysts. However, Beijing’s more ambitious approach to virus control could weigh on sentiments in the coming months, as the labour market remains sluggish and will affect income growth and consumer spending. The Chinese economy also faces increasing pressure on numerous fronts, with the property sector on the top of the list. Hence, the Chinese leadership is increasingly focusing on stabilizing growth with proactive policies, with a call for banks to increase their lending to the real estate sector during the coming quarter being the latest initiative.

Last year, global seaborne export volumes of dry bulk commodities grew by six per cent to approximately 5.4 billion tonnes. The new record exceeded the pre-pandemic record from 2019 by 130 million tonnes or three per cent. While shipments to China remained broadly in line with 2020, the growth in dry bulk exports last year was to non-Chinese ports and highlighted the shift in economic recovery from China to the rest of the world. The early recovery of the Chinese economy saw the country’s share of global seaborne trade in dry commodities jump to forty per cent in 2020, but stabilizing import volumes last year has brought it back its pre-pandemic trend.

The coming year is likely to drift in the general direction of normality, but with the coronavirus still in circulation, the process should be somewhat gradual. There is also the risk that yet another variant of the Covid-virus could wreak havoc on the global economy. Still, the increasing rollout of the vaccines should hopefully make any new outbreaks less severe. The resilience of global growth in the wake of the spread of the Omicron variant should also indicate that global demand for commodities will remain strong. Nevertheless, the rising headwinds for the Chinese economy could weigh on global demand for seaborne imports. However, once the Winter Olympics are over, there could be an increasing shift towards pro-cyclical stimulus with increasing demand for industrial commodities and seaborne transportation. In addition, the high likelihood of new disruptions in Chinese ports and limited deliveries of new tonnage should support freight rates.