By Ulf Bergman
The new year has begun with commodities and seaborne freight markets facing renewed headwinds. Concerns over global growth rates weighed on the global demand outlook on Tuesday, with many commodities and freight rates ending the day in the red. The first update of the Baltic’s dry bulk indices since before Christmas saw the BDI retreating by more than seventeen per cent amid extensive losses for the Capesizes.
Macro/Geopolitics
While the commodities and seaborne freight markets have remained relatively quiet amid public holidays and limited market liquidity, the rising Covid infection rates in China and rising global recession risks have dominated much of the news flow over the holidays. The extensive breakout of the coronavirus in the world’s most populous country following the easing of restrictions weighed on Chinese economic activities in December, and the country’s official manufacturing PMI suffered as a result. The reading of 47, which was released over the weekend, failed to match market expectations and was the lowest since the early stages of the global pandemic in 2020. The head of the International Monetary Fund also warned recently that the Chinese economy is facing headwinds in the coming months amid mounting risks of Covid-related disruptions.
The IMF is also seeing increasing risks for the global economy, with a third of the world likely to face recession during the coming year. The organisation’s head suggested in an interview a few days ago that there is a 25 per cent chance that the global GDP will fall below two per cent this year, something that would be seen as a global recession, as the US, EU and China are slowing down simultaneously. The comments are widely seen as a warning that the IMF will downgrade its projections for global growth later this month.
Commodity Markets
The Brent futures began the year in the red, as the weak Chinese PMI data put a dent in the demand outlook for crude oil. The contracts fell by more than three per cent and settled at 83.20 dollars per barrel. Continued uncertainty over the direction of the US economy and concerns over the Chinese demand outlook have also contributed to the contracts continuing lower in today’s trading.
European natural gas prices remained on their recent downward trajectory yesterday amid milder weather across the continent and robust inflows of seaborne LNG. The front-month futures declined by more than six per cent and settled at 72.31 euros per megawatt-hour, the lowest closing price since the 21st of February last year. Across the Atlantic, US natural gas prices also fell to the lowest levels since February last year, as forecasts of warmer-than-usual weather in January drow prices more than ten per cent lower.
Milder weather in parts of the Northern Hemisphere and falling natural gas prices contributed to weaker coal prices on Tuesday. The Newcastle futures for delivery next month retreated by 0.6 per cent and ended yesterday’s trading session below 361 dollars per tonne. The contracts for delivery in North-West Europe in February declined by one per cent and settled at 188 dollars per tonne.
Following steady gains throughout December, the iron ore futures trading on the Singapore Exchange began the new year in a quiet fashion. The February contracts ended Tuesday’s trading session broadly unchanged at 116 dollars per tonne. However, the contracts have given up some ground in today’s session amid losses of more than one per cent.
The base metals had a mixed first session of the year, with the futures trading on the London Metal Exchange recording both gains and losses on Tuesday. The copper and aluminium contracts ended the day in the red, with the former shedding 0.6 per cent and the latter retreating by 2.8 per cent. In contrast, the zinc futures gained one per cent and the nickel contracts advanced by 3.6 per cent.
After weekly gains during the latter parts of December amid expectations of higher Chinese demand for agricultural commodities, the grain and oilseed futures began the year on a negative note. The wheat and soybean contracts trading in Chicago declined by 2.1 per cent, while the corn futures retreated by 1.2 per cent.
Freight and Bunker Markets
The first update of the Baltic Exchange’s indices since before Christmas provided some sizeable moves yesterday as the spot market caught up with market sentiments.
The Baltic Dry Index retreated by a whopping 17.5 per cent on Tuesday amid weakness across all dry bulk vessel segments as rising Covid infection rates in China and the approaching Chinese New Year weighed on ordering activities. However, a majority of yesterday’s losses for the headline index were derived from the freight rate indicator for the Capesizes, which slumped by 27.7 per cent. Combined with the weak performance during the final two days before Christmas, yesterday’s drop erased the gains recorded during the middle of December. While not of the same magnitude as the loss recorded by the largest vessels, the mid and small-sized dry bulk vessels also had a day deeply in the red yesterday. The gauge for the Panamaxes retreated by 6.3 per cent, while the indices for the Supramxeas and Handysizes shed 8.9 and 7.4 per cent, respectively. The weakness also extended into the paper markets, with the pricing screens for the dry FFA contracts dominated by the red colour.
VLSFO prices saw mixed performances globally on Tuesday. The prices in Houston gained 2.4 per cent yesterday and ended the day above 583 dollars per tonne as bunker traders played catch-up following Monday’s public holiday in the US. In contrast, prices in Rotterdam retreated by nearly four per cent following Monday’s solid gains. However, low sulphur fuel prices in Singapore found the middle ground and remained broadly unchanged during Tuesday’s trading session.
The View from the Shipfix Desk
The new year has started with temperature records across many parts of Europe as mild weather continues to dominate large parts of the continent. The warmer-than-usual weather has eased fears of a crunch on European energy supplies during the current winter, with the risks of blackouts and energy rationing fading rapidly. As a result, European thermal coal and natural gas prices have slumped to levels last seen in February last year. The fear of natural gas shortages during the winter forced many European utilities to return to thermal coal for their power generation. However, the rediscovered appetite for the dirtiest of fossil fuels has started to fade as inventories have built up and mild weather has weighed on the electricity demand.
In the wake of the European import ban on Russian coal, the continent’s buyers faced the challenge of replacing their traditional primary source of the commodity. As a result, cargo order volumes for coal loading in South Africa destined for European ports soared to unprecedented levels in March last year and remained high throughout the remainder of the year. However, monthly volumes fell back during December and reached the lowest levels since May amid lower European demand for the commodity. While last month’s volumes still remain high in a historical context, the month-on-month decline suggests that imports may decline as the winter draws to an end.
Data Source: Shipfix