By Ulf Bergman
Macro/Geopolitics
US economic data released last week continued to strengthen the case for the Federal Reserve to maintain its current aggressive stance on interest rate hikes. Stronger-than-expected consumer confidence and labour markets are likely to produce another 75 basis point increase at the US central bank’s next rate-setting meeting. A rebound in US producer prices also suggested that the battle against high inflation may be longer than initially expected. As a result, the US dollar strengthened somewhat and added some headwinds to the commodities markets.
With the Chinese Communist Party’s congress underway, much of the week’s focus is likely to be on new policy announcements for the world’s second-largest economy. Already, President Xi has raised the temperature in the Strait of Taiwan with remarks widely seen as more combative than expected regarding the island’s status. However, for shipping and commodities markets, the announcement that the country will seek to boost the domestic supply capacity for energy is likely to grab much of the attention, as it could affect the country’s demand for seaborne imports in the longer term.
Commodity Markets
Following the solid gains recorded in the wake of the announcement from OPEC+ that oil production would be reduced from next month, last week reversed some of the advances as the demand outlook continued to soften. The mounting prospects of an increasingly strong dollar and global economic weakness drove the Brent crude oil contracts more than six per cent lower last week, with the contracts settling at 91.63 dollars per barrel on Friday.
European natural gas futures recorded a third consecutive week of losses, with warmer-than-usual weather across parts of the continent and expectations of price caps contributing to the lower prices. The front-month contracts shed more than nine per cent and settled at 142 euros per megawatt-hour on Friday, the lowest level since the last days of June. The demand outlook also softened somewhat following the release of a long-term weather forecast, which pointed towards a high likelihood of the continent experiencing a milder-than-usual winter. Across the Atlantic, US natural gas futures continued to lose ground amid rising production, and the contracts recorded a weekly loss of 4.4 per cent.
In contrast to the other energy commodities, thermal coal futures gained ground last week as a strike in South Africa threatened to affect global supplies. The Newcastle futures for delivery in November gained 4.6 per cent for the week and settled at 398 dollars per tonne, while the Rotterdam contracts advanced by 4.8 per cent and ended the week at 264 dollars per tonne.
Iron ore futures trading in Singapore ended last week marginally below the previous one. However, the modest 0.3 per cent decline for the week masked volatile conditions throughout the week. Continued concerns over the strength of the Chinese economy have seen the steelmaking ingredient trending lower since the beginning of the second quarter, with Thursday’s close below 92 dollars per tonne the lowest in nearly a year.
Like iron ore, the base metals endured a volatile week. Global supply concerns amid high energy prices and an increasingly gloomy economic outlook contributed to prices seeing substantial swings throughout the week. The copper futures trading at the London Metal Exchange gained 1.1 per cent, while the aluminium contracts saw a modest 0.3 per cent advance. In contrast, zinc and nickel ended the week in the red, with the former recording a weekly loss of 1.7 per cent and the latter retreating by 3.2 per cent.
Renewed concerns over the future of the deal that has allowed Ukraine to resume seaborne shipments of agricultural commodities contributed to a volatile week for wheat prices. The contracts trading in Chicago advanced nearly seven per cent last Monday but gave up the gains as the week progressed and ended Friday’s session with a weekly loss of 1.7 per cent. For soybeans and corn, last week proved to be far less eventful, and the futures contracts for the two commodities ended the week around one per cent higher.
Freight Markets
Last week saw a substantial divergence between the dry and wet freight markets, with the Baltic Exchange’s indices for the former all in the red while the latter showed robust returns.
The Baltic Dry Index dropped by 6.3 per cent last week amid weakness among the larger vessel segments. The sub-index for the Capesizes retreated by 9.6 per cent, offsetting nearly half of the gains from the preceding week. While Shipfix’s data suggested that ordering activities in the segment remained stable, an increase in available tonnage put pressure on the freight rates. The Panamaxes also had a bad week, with the gauge for the charter rates in the segment falling by 6.9 per cent and nearly negating all gains from a week earlier. The smaller tonnage segments also saw declines but to a lesser extent. The indicator for the Supramaxes fell by almost one per cent, while the sub-index for Handysizes shed two per cent.
If the week was a challenge for the dry bulk vessels, the Baltic’s indices for the wet trade had a week of solid gains. The dirty and clean tanker indices shook off any ill effects of the announced oil production cuts and advanced by around 6,5 per cent, following steady progress throughout the week. The gauges for the gas carriers did even better, with gains in double-digit territory. The index for the LNG tankers advanced 11.4 per cent last week, while the indicator for the LPG carriers gained 10.1 per cent.
The View from the Shipfix Desk
The strike among port workers in South Africa has curtailed the country’s exports and caused congestion around its ports. The labour dispute over pay has also reduced the country’s exports of coal and sent global prices for the dirtiest of fossil fuels higher. Thermal coal futures gained nearly five per cent last week, even as other energy prices were declining. While South African coal only accounts for a minor part of global supplies, the tight supply situation globally led to a sharp price rise.
European buyers of coal have become increasingly dependent on South African supplies as they have sought to replace imports from Russia. Hence, cargo-ordering activities have been increasing since the Russian invasion of Ukraine. However, Shipfix’s order data showed that the weekly volumes were declining in the run-up to the strike. Last week nevertheless showed a rebound in cargo orders, suggesting that European buyers were expecting a swift solution to the standoff.
Capesize freight rates have staged a remarkable recovery since the beginning of September, following an abysmal three months. Still, despite the rapid rebound, daily freight rates remain well below what has been observed during the same period in recent years. Hence, if history provides any guidance, there could be an additional upside, but rising economic and geopolitical headwinds could derail such assumptions.
Data Source: Shipfix