The BDI retreated for a fourth consecutive session on Tuesday, with lower demand for the Capesizes continuing to provide the headwinds. Among the commodities, energy prices retreated while more support for the Chinese economy contributed to higher iron ore and base metal prices.
By Ulf Bergman
Macro/Geopolitics
Yesterday turned out to be quite an eventful day in China. The country’s leadership made the rare move to adjust the current year’s budget. The initiative was widely seen as another attempt to shore up the world’s second-largest economy in the face of continued woes for the country’s embattled real estate sector and high debt levels among the nation’s local authorities.
As part of the revised budget, the budget deficit will be increased to 3.8 per cent of GDP, up from the 3.0 per cent set in March. In addition, the country will issue an additional sovereign debt worth one trillion yuan (approx. USD 137 billion) during the fourth quarter, putting more of the burden of stimulating the economy on the central government rather than local authorities.
On top of the direct measures to revive the economy, President Xi made a symbolic visit to the country’s central bank yesterday, supposedly a first during his reign, highlighting his support for new policies.
The renewed efforts by Beijing to support the Chinese economy underline the challenges it faces amid multiple headwinds. At the same time, the new measures will likely translate into higher Chinese demand for commodities and provide support for prices and dry and wet freight rates.
Commodity Markets
Crude oil extended Monday’s losses during yesterday’s session amid signs that the conflict between Israel and Hamas is being contained. The December Brent futures declined by 2.0 per cent, settling just above 88 dollars per barrel. The contracts have also continued to slide in today’s early trading, with losses of around a quarter of a per cent.
Mild weather across parts of the continent and ample supplies contributed to European natural gas prices declining on Tuesday. The front-month TTF futures shed 3.9 per cent yesterday and ended the session at 49.26 euros per MWh. Today’s trading began with some of yesterday’s losses recovered amid gains of around one per cent, but the contracts have since reversed course and fallen into the red.
Coal also posted significant losses during yesterday’s trading session amid weaker demand. The front-month Newcastle futures declined by 3.7 per cent and ended the day at 134.65 dollars per tonne. The contracts for delivery in Rotterdam next month retreated by 2.5 per cent and settled at 133 dollars per tonne.
The news that the Chinese leadership will increase the budget deficit and issue more sovereign debt in order to support the economy contributed to significant gains for iron ore as investors upgraded their expectations for Chinese steel demand. The SGX iron ore futures for delivery next month surged by 3.0 per cent, ending yesterday’s session at 116.10 dollars per tonne. The contracts have also continued to move higher during today’s session, with gains of around one per cent.
An improving Chinese demand outlook contributed to higher base metal prices yesterday despite the US dollar gaining considerable ground. The three-month copper futures listed on the LME recorded a daily gain of 1.0 per cent, while the aluminium contracts rose by 0.7 per cent. The zinc and nickel futures also advanced, with the former increasing by 0.9 per cent and the latter closing 0.5 per cent higher.
The grain and oilseed futures listed at the CBOT moved in opposite directions yesterday. The wheat and corn December futures fell by 1.1 and 1.3 per cent, respectively. Reports of the corn harvest progressing faster than usual and that the planting of winter wheat was ahead of the average contributed to the lower prices. On the other hand, the November soybean futures advanced by 0.7 per cent amid reports of higher Chinese demand for US exports.
Freight and Bunker Markets
The Baltic Dry Index extended its losing streak into a fourth consecutive session on Tuesday, with a decline of 3.4 per cent. Continued weakness for the Capesizes was the primary driver for the decline, but the Supramaxes and Handysizes also had a day in the red. The sub-index for the largest vessel fell by 5.7 per cent as cargo order volumes remained weak and tonnage supply increased. The freight gauges for the Supramaxes and Handysizes shed 1.0 and 0.4 per cent, respectively. In contrast, the indicator for the Panamaxes rose by 0.6 per cent amid firmer demand.
The wet freight rate indices were all in the black yesterday. The dirty and clean tanker gauges advanced by around one per cent as sentiments remained bullish. The indices for the LNG and LPG carriers increased by 3.7 and 4.7 per cent, respectively.
Falling crude oil prices contributed to losses across most of yesterday’s trading in bunker fuels. The VLSFO retreated by 2.2 per cent, with the daily losses in Houston and Rotterdam close behind at 1.9 per cent. The MGO fell by 1.7 per cent in Houston, while the losses in Rotterdam reached 2.8 per cent. On the other hand, the trading in MGO in Singapore ended in the black amid a daily gain of 0.5 per cent.
The View from the Shipfix Desk
As highlighted in previous editions of The Fix, the memories of the Chinese unofficial ban on imports of coal from Australia are fading fast. Since the beginning of the year, volumes have steadily recovered from virtually zero over the preceding two years, as China’s appetite for the dirtiest of fossil fuels remains strong. Still, despite the recovery and recent solid monthly volumes, the total for the year may fall short of what was observed during the years prior to the introduction of the embargo.
The demand in the spot market for seaborne transportation of Australian coal to Chinese ports has been trending higher throughout the year. However, after reaching nearly five million tonnes in September, the current month may be on course for a month-on-month decline, the first since July. Assuming a linear development for the remainder of the month, demand in the spot market in October could reach 4.7 million tonnes, a decline of around five per cent compared to September.
The recovery of the Australian coal trade with China has primarily benefitted the Panamaxes and Capesizes in the spot market. The average cargo order size has been trending higher throughout the year and has reached 85,000 tonnes during the current month. During the period of the Chinese ban on most Australian imports, spot demand for the Australian coal trade shifted somewhat towards the smaller segments. Hence, the renewed Chinese appetite for Australian coal will provide support for freight rates in the larger segments, but the recent deceleration could temper sentiments to some extent.
Data Source: Shipfix