Shipfix-Global Market Update

The Baltic Dry Index faced considerable headwinds over the past week as declining order volumes for the Capesizes weighed heavily on spot freight rates in the largest segment. Among the commodities, iron ore and many base metals benefitted from an improving demand outlook on the back of more stimulus for the Chinese economy.

By Ulf Bergman


Macro/Geopolitics

After last week’s announcement that China is allowing for a higher budget deficit during the current year and that the country will issue an additional one trillion yuan of sovereign debt during the fourth quarter, this week will see the release of PMI data for the world’s second-largest economy. The gauges will provide additional insights into the state of the Chinese economy. The official gauges will be published on Tuesday, with Caixin following suit on Wednesday. Markets expect the gauges to be broadly in line with the readings for September, i.e. mildly expansionary. 

Across the Pacific, much of the focus will be on the meeting of the Federal Reserve’s policymakers on Wednesday. Markets are expecting interest rates to be left unchanged at 5.5 per cent.

Commodity Markets

Despite a solid end to the week, with gains of nearly three per cent on Friday, crude oil recorded a decline for the past week. Hopes during the early parts of the week that diplomacy would succeed in limiting the fallout of the conflict between Israel and Hamas contributed to the December Brent futures retreating by 1.8 per cent over the course of last week. After a  2.9 per cent gain on Friday, the contracts ended the week at 90.48 dollars per barrel. The recent volatility has been maintained into the new week, with the December futures shedding around 1.5 per cent in today’s trading.

European natural gas prices swung between daily gains and losses throughout the past week as concerns over global LNG supplies and weakening demand competed for the limelight. The front-month TTF futures recorded a weekly loss of 1.1 per cent as they settled at 50.32 euros per MWh on Friday. However, the contracts have reversed course in today’s early trading, with gains approaching one per cent. 

Following significant losses during the first half of the week, coal prices fell to a greater extent than the other energy commodities. An increase in output of the dirtiest of fossil fuels in response to higher global demand contributed to the sliding prices. The Newcastle futures for delivery next month declined by 6.1 per cent over the week, ending at 134.25 dollars per tonne. The contracts for delivery in Rotterdam recorded a weekly loss of 6.5 per cent after settling just above 130 dollars per tonne on Friday. 

Last week’s announcement that the Chinese government will allow for a higher budget deficit and raise an additional one trillion yuan in sovereign debt during the fourth quarter in order to stimulate the country’s economy contributed to an improving demand outlook for iron ore. The November iron ore futures listed on the SGX delivered a weekly gain of 6.3 per cent and ended Friday’s session at 119.67 dollars per tonne, the highest closing price since the middle of September. Last week’s positive momentum has also carried into the new week, with gains topping 1.5 per cent during Monday’s trading. 

Despite the dollar gaining strength last week, the base metals generally fared well, as the demand outlook improved amid the developments in China. The three-month copper and aluminium futures listed on the LME recorded weekly advances of nearly two per cent, while the zinc contracts increased by 1.4 per cent. However, the nickel futures went against the flow and declined by 1.2 per cent last week. 

An improving supply situation provided headwinds for the grain and soybean futures listed on the CBOT during the past week. The December wheat contracts delivered a weekly decline of 1.8 per cent, while the corn futures shed 3.0 per cent over the past five sessions. The November soybean contracts retreated by 0.4 per cent.

Freight and Bunker Markets

The Baltic Exchange’s dry bulk indices sailed into significant headwinds last week, with the Capesizes facing the stiffest resistance. The Baltic Dry Index dropped by 23.6 per cent over the week, with a 37.4 per cent slump for the sub-index for the largest vessels providing most of the downward momentum. The freight rates in the Capesize segment came under significant pressure as global cargo order volumes remained weak for a second consecutive week. The Supramaxes also had a week deeply in the red as global cargo order volumes declined for a third week, contributing to a weekly decline of 8.0 per cent. The Panamaxes and Handysizes fared somewhat better last week, with their freight rate indicators declining by 2.0 and 2.2 per cent, respectively.  

In contrast to the dry bulk indices, the Baltic’s gauges for the wet freight rates advanced last week. The dirty and clean tankers saw spot freight rates rise by 10.0 and 3.5 per cent, respectively, as the risk of disruptions to shipments from the Middle East fuelled expectations of higher tonne-mile demand. Still, the indices for the liquified gas carriers were the past week’s stellar performers. The LNG and LPG freight indicators both advanced by around sixteen per cent. 

The trading in bunker fuels endured a volatile week with substantial daily swings between gains and losses. Still, the daily gains were not sufficient to avoid weekly losses across the board. In Singapore, the VLSFO declined by 2.6 per cent over the past five sessions. However, the losses were more significant in Houston and Rotterdam at 3.4 and 4.0 per cent, respectively. The trading in MGO also recorded substantial losses over the past week. Houston led the way lower with a weekly decline of 5.5 per cent, while losses were somewhat more moderate at around 2.5 per cent in Singapore and Rotterdam.

The View from the Shipfix Desk

After having provided much of the upward momentum for the Baltic Dry Index over the best part of the past two months, the Capesizes weighed heavily on the headline index last week. After five sessions in the red, the freight index for the largest vessels recorded a weekly decline of 37.4 per cent. Last week’s development erased the previous month’s gains and brought the gauge back down to the levels seen during the last week of September.

Weekly spot cargo order volumes for the Capesizes have dropped sharply in the past two weeks. The week before last saw the global aggregate drop by nearly 50 per cent week-on-week. While the decline in demand was seen globally, the Atlantic basin provided much of the downward momentum. Hence, the drop in cargo order volumes provided a leading indicator for last week's substantial drop in spot freight rates. 

In terms of lower demand and cargo destinations, the drop in order volumes was, to a great extent, driven by lower demand for seaborne transportation of commodities to Chinese ports. Over the past two weeks, volumes for discharge in China have halved compared to what was observed during the first half of October. Still, as a large part of the decline in demand for Capesizes is linked to lower Chinese activities, the past week’s economic announcement could translate into higher demand for Capesizes and a rebound for the segment’s freight rates.

Data Source: Shipfix