By Ulf Bergman
Macro/Geopolitics
The past week saw additional signs that the Chinese economy is struggling to gain traction after last year’s removal of anti-Covid policies. Trade data highlighted falling domestic and overseas demand, with exports and imports falling compared to a year ago. In addition, continued low inflation confirmed sluggish domestic demand growth. The disappointing data contributed to mounting expectations of more stimulus measures for the Chinese economy, boosting the demand outlook for commodities such as iron ore.
Much of the focus for the week ahead will be on US inflation data and the Federal Reserve’s interest rate decision. The US central bank is widely expected to leave interest rates unchanged on Wednesday after raising interest rates by five percentage points over the last 14 months, as inflation rates are showing signs of easing. While many of the Fed’s policymakers have expressed a preference for a pause in the monetary tightening, stronger-than-expected inflation data on Tuesday could force a rethink.
Commodity Markets
Despite Saudi Arabia’s unilateral decision to reduce crude oil production next month, prices retreated for a second consecutive week amid concerns over the global demand outlook following weak Chinese economic data. The Brent August futures declined by 1.8 per cent last week and settled at 74.79 dollars per barrel, following a 1.5 per cent retreat on Friday. The negative momentum has also carried into the new week, with the contracts shedding more than two per cent during Monday’s early trading.
The past week delivered extensive volatility for European natural gas prices, with three out of five sessions recording daily changes in the double-digit territory. Renewed uncertainty over global supplies amid mounting competition for LNG cargoes and rising temperatures contributed to the big price swings. Following a daily gain of 17.9 per cent on Friday, the front-month futures settled at 32.05 euros per MWh, 35.3 per cent above the previous week’s close. After early gains, the contracts have reversed course in today’s session and are trading around eight per cent below Friday’s close.
Thermal coal gained during the past week as demand picked up amid rising demand as higher temperatures in key markets boosted the need for electricity for cooling. However, the soaring European natural gas prices saw the futures for delivery in Rotterdam outperforming the Newcastle contracts by quite a margin. The front-month contracts for delivery in the European port gained 20.4 per cent over the past week and settled just below 113 dollars per tonne on Friday. In contrast, after settling at 143.70 dollars per tonne on Friday, the weekly gain for the Newcastle futures for delivery next month was more modest at 7.1 per cent.
Mounting expectations of more support for the flagging Chinese economy supported iron ore prices last week. The July futures listed on the Singapore Exchange recorded daily gains throughout the past week and ended Friday’s session at 112.59 dollars per tonne, 8.4 per cent above the previous week’s close. However, the new week has begun in the red, with the contracts shedding more than three per cent in today’s trading.
The contradicting forces of weak economic data and hopes of more economic stimulus in China, combined with a weaker dollar, saw base metals swinging between minor gains and losses last week. The three-month copper futures listed on the LME gained 1.6 per cent during the week, while the aluminium contracts edged up by 0.2 per cent. The zinc futures delivered the week’s most robust performance amid a gain of 4.2 per cent, while nickel went against the flow and recorded a marginal weekly loss of 0.2 per cent.
Rising tensions and concerns over future Ukrainian wheat exports in the wake of the destruction of a dam in eastern Ukraine contributed to increasing prices last week. The wheat July futures trading in Chicago recorded a 1.8 per cent gain last week. The soybean contracts advanced by 2.5 per cent amid forecasts of dry weather conditions in the US Midwest, which have raised concerns about recently planted crops. On the other hand, the corn futures retreated by 0.8 per cent over the past week, with the contracts swinging between gains and losses.
Freight and Bunker Markets
The Baltic Dry Index recorded its first weekly gain since April during the past week amid positive developments for the larger vessel segments. The headline index recorded a weekly increase of 14.8 per cent amid a sizeable rebound for the Capesizes. The indicator for the largest vessels soared by 35.7 per cent as tonnage supply continued to trend lower. The Panamaxes also observed rising spot freight rates during the past week, with their sub-index gaining 11.3 per cent. In contrast, the smaller vessel segments remained on their current downward trajectory. The indicators for the Supramaxes and Handysizes declined by 10.1 and 8.1 per cent, respectively, as demand remained weak during the past five sessions.
Most of the Baltic’s tanker freight indices faced headwinds during the past week, as the demand outlook took a hit amid weak economic data. The dirty tanker index declined by 1.8 per cent, while the gauge for their clean relatives dropped by 10.1 per cent. The index for the LPG tankers ended a run of nine positive weeks with a decline of 11.6 per cent. On the other hand, the freight rate indicator for the LNG carriers recorded a second week of solid growth. Following a 15.0 per cent gain on Friday, it ended the week 24.3 per cent above the preceding week’s close.
Despite a retreat for crude oil prices last week, bunker fuel prices advanced across the board over the course of the past five trading sessions. VLSFO and MGO gained more than four per cent in Singapore last week. The increases in Houston and Rotterdam were smaller but nevertheless significant. The VLSFO advanced by 2.4 per cent in Houston and 1.0 per cent in Rotterdam, while MGO prices rose by 0.7 and 2.3 per cent in the two ports.
The View from the Shipfix Desk
In the past few weeks, grain prices have been recovering from recent lows amid increasing uncertainty over the future of the Black Sea Grain Initiative. In addition to rising tensions in the wake of the recent dam destruction in eastern Ukraine and increasing military activities, Russia has signalled that it is unhappy with the deal and may terminate its participation or refuse a further extension. The Russian complaints over the agreement have been that the country’s exports of agricultural commodities and fertilisers, which are not covered by any sanctions, have not seen the expected positive effects from the country’s participation in the arrangement.
Cargo order volumes for fertilisers loading in Russian ports surged in May after trending lower throughout the early parts of the year. Rising demand for seaborne transportation to Brazil, India, China and Southeast Asia was chiefly responsible for the month-on-month increase. Hence, the forward-looking nature of the data suggests that there will be increasing volumes of Russian fertilisers discharged in those countries in the coming months. However, the current month has come off to a slow start, with order volumes for the first third of the month suggesting that the aggregate will fail to match what was recorded in May. The development may fuel further uncertainty over the prospects of the BSGI.
Data Source: Shipfix