Despite a rebound on Friday for the Capesizes, the past week saw dry bulk spot freight rates continuing to decline. The headline BDI shed more than six per cent as cargo order volumes remained under pressure. Among the commodities, iron ore was one of the past week’s winners as investors upgraded their expectations for Chinese demand. In contrast, energy prices faced considerable headwinds as supply concerns eased.
By Ulf Bergman
Macro/Geopolitics
Signs that the US labour market is coming under some pressure contributed to the dollar recording a significant decline last week. Softer-than-expected US jobs data released on Friday suggested that the Federal Reserve may refrain from further interest hikes during the current cycle, and, as a result, the US dollar index fell by 1.4 per cent over the past five sessions.
The week ahead will provide further insights into the state of the Chinese economy following last week’s lacklustre PMI data. The data for the country’s exports and imports during October will be released tomorrow, with markets expecting the trade surplus to increase as exports are seen to record a lesser decline than imports. Additionally, the country’s latest inflation data will see the light of day on Thursday, with the consensus projection pointing towards a marginal dip into the deflationary territory for the year-on-year reading.
Commodity Markets
Crude oil recorded a significant decline under volatile conditions over the past week as concerns over global supplies receded. A combination of lower US demand and easing concerns over supplies from the Middle East contributed to the January Brent futures declining by 4.8 per cent during the past five trading days. The contracts settled at 84.89 dollars per barrel on Friday amid a 2.3 per cent drop during the week’s final session. However, today’s trading has seen the contracts regaining some of the past week’s losses following reports that Saudi Arabia and Russia are extending their voluntary output cuts until the end of the year.
European natural gas prices retreated for a third consecutive week, with the front-month TTF futures recording a weekly loss of 9.4 per cent as they settled at 48.05 euros per MWh on Friday. Weaker demand amid mild weather across parts of the continent and continued high inventory levels contributed to the significant drop. Last week’s negative momentum has carried into the new week, with the contracts shedding nearly four per cent in Monday’s early trading.
The bearish sentiments for energy also extended to the coal markets during the past week. An improving supply outlook amid higher global production contributed to significant losses for the front-month futures for delivery in Newcastle and Rotterdam. The former contracts recorded a weekly loss of 9.7 per cent and ended Friday’s session at 125.75 dollars per tonne. For the latter futures, the weekly decline was somewhat more modest at 5.7 per cent, and the contracts settled at 120.65 dollars per tonne.
Despite the weak Chinese PMI data, iron ore advanced over the past week amid an improving demand outlook. Investors expected that the Chinese appetite for the steelmaking ingredient would pick up amid low inventories and more stimulus for the world’s second-largest economy. The December futures listed on the SGX recorded a weekly gain of 4.8 per cent as they settled at 122.94 dollars per tonne on Friday. The contracts have also continued to move higher in today’s trading, with gains approaching one per cent.
Most of the base metals benefitted from an improving demand outlook and a weaker US dollar. The three-month copper futures listed on the LME advanced by 0.9 per cent over the past week, while the aluminium and zinc contracts recorded weekly gains of 1.5 and 2.1 per cent, respectively. On the other hand, the nickel futures went against the flow with a weekly decline of 0.8 per cent.
Despite solid gains on Friday amid reports of lower Argentinan production, the December wheat futures listed on the CBOT recorded a weekly decline of 0.5 per cent. Likewise, a solid finish to the week was not enough to bring the corn contracts out of the red. The latter crop recorded a weekly loss of 0.7 as heavy rains in Argentina improved the supply outlook. On the other hand, robust Chinese demand and concerns over Brazilian supplies contributed to the January soybean futures advancing by 2.4 per cent over the past five sessions.
Freight and Bunker Markets
The Baltic Exchange’s dry bulk freight indices recorded a second consecutive week with all indicators in the red. Despite a positive performance on Friday amid a rebound for the Capesizes, the headline Baltic Dry Index declined by 6.5 per cent last week. Unlike over the preceding five sessions, the Capesizes were the least bad performers last week amid a 13.3 per cent increase on Friday. Still, despite the rebound, the sub-index for the largest vessels recorded a weekly decline of 4.2 per cent as cargo order volumes remained subdued. The Panamaxes were the past week’s worst performers, with their freight gauge declining by 9.2 per cent amid low order volumes across all basins. Weak demand also weighed on the Supramaxes and Handysizes, with their freight gauges dropping by 7.0 and 5.5 per cent, respectively.
Unlike the indicators for the dry bulk sector, most of the Baltic Exchange’s indices for wet freight were in the black last week. The dirty tanker index rose by 3.6 per cent, an eighth consecutive weekly gain, as the risk of disruptions to exports from the Middle East supported sentiments. In contrast, the indicator for the clean tankers declined by 2.5 per cent. The gauges for the liquefied gas carriers benefitted from the traffic restrictions in the Panama Canal amid low water levels. The freight index for the LPG tankers recorded a weekly gain of 18.5 per cent, while the LNG gauge rose by 2.8 per cent.
The trading in bunker fuels remained volatile throughout the past week, with mixed fortunes across the world’s leading maritime hubs. The VLSFO advanced by 3.9 per cent in Singapore and 0.4 per cent in Rotterdam last week while dropping by 1.0 per cent in Houston. For the MGO, the picture was the opposite. The latter fuel advanced by 1.1 per cent in Houston, while Singapore and Rotterdam recorded losses of 1.4 and 0.2 per cent, respectively.
The View from the Shipfix Desk
The tug-of-war between China bears and bulls remains firmly in place, with the past week’s weak PMI data for the country’s manufacturing sector providing the pessimists with additional fuel for their arguments. Still, there are some signs that the Chinese economy may be on course for improving conditions.
Friday’s edition of The Fix highlighted that demand for seaborne transportation of copper for discharge in Chinese ports has been trending higher throughout October. Given the red metal’s traditional role as a bellwether for economic growth, the rebound in demand could signal improving economic conditions in the world’s second-largest economy amid increasing support from the central government. Likewise, a downward trend for cargo order volumes for Chinese steel exports points towards higher domestic demand for the metal and highlights a potential rebound for growth rates.
After a strong rebound following the Chinese public holidays at the end of September and the beginning of October, cargo order volumes for steel exports came under pressure during the past two weeks. Last week, cargo order volumes dropped below one million tonnes, and at the same time, Chinese steel rebar prices reached the highest level since the middle of September amid robust demand and low inventories. The two developments provide some support for the notion that Chinese industrial output may recover amid more stimulus for the economy.
A continued drop in Chinese demand for seaborne transportation of steel exports amid stronger domestic demand will put some pressure on freight rates. While the average cargo sizes have been trending higher in the past few weeks, it is primarily a case of a return to the long-term mean of around 25,000 tonnes. Hence, any pressure on demand will mainly affect the smaller segments.
Data Source: Shipfix