By Ulf Bergman
Macro/Geopolitics
Central banks dominated much of the past week’s news flow. The week began with the People’s Bank of China lowering its key interest rates for the first time in ten months to boost confidence in the world’s second-largest economy. However, while the cuts were widely expected, they were deemed by many too small to make any material impact on the flagging economic recovery and many commodities suffered as a result.
Later in the week, hawkish comments from Federal Reserve’s Chair during a testimonial to the US Congress contributed to rising expectations of further US interest rate hikes in the coming months. The development supported the US dollar, which gained more than half a per cent in the past week and added further pressure on the demand outlook for many commodities.
In the week ahead, further pointers on the health of the world’s two largest economies will be provided. US durable goods order data will be released tomorrow, with markets expecting a one per cent contraction. Friday will see the release of China’s official PMI data for June, with markets will watch closely following May’s surprise descent into contraction territory for the manufacturing gauge.
Commodity Markets
After a week’s pause, crude oil prices resumed their journey south during the past five sessions. The Brent August futures recorded a weekly loss of 3.6 per cent as the demand outlook darkened amid expectations of more monetary tightening in the US and Chinese stimulus failing to impress. The contracts have begun the new week with limited gains, with the weekend’s turmoil in Russia supporting prices.
European natural gas prices remained volatile last week, with losses during the second half offsetting Tuesday’s substantial gains. The front-month futures declined by 7.1 per cent and ended Friday’s session at 32.51 euros per MWh as supply concerns subsided. However, the events unfolding in Russia over the past few days have seen a reversal of fortunes, with the contracts trading around five per cent above Friday’s close during today’s session.
The coal futures had a week of diverging fortunes. The contracts for delivery in Rotterdam next month gave up early gains and ended the week unchanged at 115 dollars per tonne as falling natural gas prices weighed on developments during the second half of the week. In contrast, the July Newcastle futures advanced by 4.6 per cent over the past week, as demand saw a rebound amid rising temperatures in parts of the Northern Hemisphere.
Fading hopes that Chinese attempts to support flagging growth rates would drive iron ore demand higher weighed on prices for the steelmaking ingredient last week. The July futures listed on the Singapore Exchange retreated by 3.8 per cent over the past five sessions and settled at 109.19 dollars per tonne on Friday. The new week has begun with the contracts remaining broadly unchanged.
The prospects of further headwinds for global growth and a stronger dollar saw the base metals retreating on a broad front last week. The three-month copper futures listed on the LME declined by 3.2 per cent, while the aluminium and zinc contracts recorded weekly losses of around 4.5 per cent. Nickel delivered the week’s worst performance, with the contracts shedding 7.5 per cent.
The grain and oilseed futures faced headwinds during the second half of the week following substantial gains on Tuesday and Wednesday. Rising tensions in Ukraine and dry weather in the US Midwest, which threaten to reduce the upcoming harvest, fuelled the early gains. However, easing concerns saw prices coming under pressure during the final two trading sessions. Still, the wheat futures for delivery next month advanced by 6.4 per cent over the course of the week, despite shedding 0.9 per cent on Friday. The soybean contracts recorded a weekly gain of 1.9 per cent, despite giving up ground during the week’s final two sessions. In contrast, after gaining considerable ground during the early parts of the week, the corn futures declined sharply on Friday amid chances of rain in some key US growing areas.
Freight and Bunker Markets
The Baltic Dry Index delivered a third consecutive week in the black as the headline indicator advanced by 15.2 per cent over the past five sessions. However, the gains were solely due to a solid week for the Capesizes, as the other segments ended the week in the red. The sub-index for the largest vessels surged by 36.1 per cent as ordering activities during the week ended a downward trend. In contrast, amid subdued cargo order volumes, the Panamaxes saw their freight rate indicator decline by 5.5 per cent last week. By comparison, the weekly losses for the Supramaxes and Handysizes were relatively modest at 0.7 and 1.9 per cent, respectively.
The darkening demand outlook for crude oil weighed on sentiments for the dirty tankers last week, with the Baltic’s freight index for the sector recording a weekly decline of 8.9 per cent. On the other hand, the clean tankers’ gauge advanced by 2.4 per cent. For the gas carriers, both the LPG and the LNG freight indices increased by 15.1 per cent.
Bunker fuels had a volatile week, with diverging fortunes across the world’s leading maritime hubs. Rotterdam saw the most significant weekly moves, with both VLSFO and MGO in the red. The former declined by 2.0 per cent, while the latter shed 3.0 per cent. In Singapore, the fuels ended Friday’s session broadly unchanged for the week. On the other hand, the trading in Houston was mixed, with the VLSFO gaining 1,1 per cent and the MGO shedding 0.5 per cent.
The View from the Shipfix Desk
Temperatures in parts of China have been soaring in recent days, with the quicksilver topping 40 degrees Celsius in the country’s capital. China’s Meteorological Administration has also forecast that the extreme conditions will persist across much of the country's northern parts for the remainder of the week. The high temperatures will increase the demand for electricity in the world’s second-largest economy as air-conditioning and refrigeration use rises. As much of China’s electricity is produced by coal-fired power plants, the consumption of the fossil fuel will increase.
Weekly cargo order volumes for coal discharging in China have shown weakness recently. Despite the rising temperatures and greater use of coal for electricity production, demand for seaborne transportation of coal to China has been trending lower throughout June, suggesting that there has been a build-up of inventories as the country’s recovery has stalled.
The decline in Chinese demand for seaborne transportation of coal has to a great extent affected the order volumes for Indonesia, which dropped below 2.5 million tonnes last week. At the same time, the spot order volumes for shipments from Australia continued to show a modest recovery following the removal of the Chinese ban on coal imports from the country.
Data Source: Shipfix