By Ulf Bergman
Macro/Geopolitics
Rising concerns that the rising Covid infection rates will lead to new restrictions and lockdowns in China have put pressure on the Chinese financial markets, as investors are pricing in renewed disruptions to the country’s economy. A new round of lockdowns could potentially derail the fragile recovery of the world’s second-largest economy and dim the demand outlook for many commodities. In addition, the increasingly precarious state of the global economy will mean any weakness in the Chinese economy will add fuel to the recession narrative.
As previously highlighted in The Fix, one of the dangers to the global economy is the perception that inflation is here to stay and that prices are expected to continue to rise sharply, which will lead to higher wage expectations etc. The vicious circle has the potential of making higher inflation a self-fulfilling prophecy. In line with this, yesterday saw the release of data for US consumer inflation expectations, with the gauge reaching its highest level. US consumers expect prices to rise by 6.8 per cent in the coming year, up from 6.6 per cent a month ago. Hence, the Federal Reserve is facing yet another challenge with increasing wage inflation, as the US labour market remains tight.
Commodity Markets
Oil prices took a severe beating during yesterday’s trading session amid increasing fears that the global economy will fall into a recession and increasing risks of new Covid restrictions in China, the world’s largest importer of the commodity. Brent futures dipped below 100 dollars per barrel to a three-month low following a 7.1 per cent decline. The contracts have recuperated some of yesterday’s loss in the early parts of today’s session and are trading around 100.50 dollars per barrel, one dollar higher than yesterday's close.
Following two days of declining prices, European gas prices reversed course on Tuesday and gained nearly five per cent, with front-month futures settling at 172.61 euros per megawatt-hour. The closure of the Nord Stream pipeline for planned maintenance works has reduced the flow of Russian gas to the European markets, with traders increasingly worried that the cut will be permanent.
Thermal coal prices continued to move higher during yesterday’s session, with Newcastle futures for delivery in August settling at 438 dollars per tonne following a 2.7 per cent gain. Continued strong demand amid high natural gas prices and supply disruptions in the European gas market, combined with falling shipments of Australian coal due to bad weather, supported the higher prices.
The potential for new Covid-restrictions in China and lower global growth contributed to iron ore prices falling sharply in Tuesday’s trading. Futures for delivery in August trading at the Singapore Exchange dropped by 4.6 per cent to just below 105 dollars per tonne, the lowest since early December last year. However, the contracts have recovered somewhat in today’s session and are trading around three per cent higher.
The increasingly gloomy outlook for the global economy also weighed on base metals trading at the London Metal Exchange. Copper futures closed three per cent lower at the lowest level since November 2020. The other base metals did not fare much better, with aluminium and zinc settling around 0.8 per cent lower while nickel dropped by 2.1 per cent.
An improving supply outlook saw wheat futures trading in Chicago dropping by five per cent to near the price levels seen immediately before the Russian invasion of Ukraine. An upward revision of the USDA’s production projections saw corn futures dropping by 6.2 per cent, while a weaker demand outlook contributed to soybeans futures closing 2.9 per cent lower.
Freight Markets
Dry bulk freight rates retreated yesterday, with all of the Baltic Exchange’s indices in the red. In contrast to recent days, the Capesizes returned to the role as the worst performer, and the segment’s sub-index declined by 4.9 per cent. Increasing concerns over the demand outlook and falling ordering activities saw the gauge mirroring the performance of the iron ore futures. The Panamaxes continued to extend their run of daily losses to a sixteenth consecutive day, with the segment’s sub-index retreating by 3.5 per cent amid limited order volumes. The smaller vessel segments fared somewhat better, with the Supramaxes declining by 1.3 per cent and the Handysizes losing 0.3 per cent.
The recent narrative in the wet market remained in place yesterday, with the dirty tankers continuing to gain ground while their clean siblings headed lower. The Baltic Exchange’s dirty tanker index settled 0.7 per cent higher, while the clean equivalent shed 0.9 per cent. The indices for the gas carriers also moved lower, with the indicator for the LNG tankers dropping by 1.3 per cent and the LPG index retreating by 1.8 per cent.
The View from the Shipfix Desk
Thermal coal prices have been steadily gaining ground in the last month, with Newcastle futures trading at record highs. Tight global supplies and a revival of the demand for the dirtiest of fossil fuels amid disruptions and high prices in the natural gas markets have been the primary drivers behind the recent gains. However, a spate of adverse weather conditions in Australia affecting the rail transportation of coal to the Australian ports has also contributed to the rising prices, with global supplies tightening further.
The recent disruptions due to the weather conditions have affected ordering activities. Shipfix’s data highlights a significant drop in demand for vessel loading coal in Australian ports in recent weeks, and the early parts of the current week show no signs of a rebound. Hence, thermal coal prices are unlikely to reverse course in the near future amid the increasingly tight supply situation.
Data Source: Shipfix