The BDI recorded a marginal loss yesterday, as weakness for the Capesizes offset gains for the Panamaxes. Weak Chinese trade data and a stronger dollar weighed on iron ore and base metals, while supply concerns supported many energy commodities.
By Ulf Bergman
Macro/Geopolitics
There appears to be no end in sight for the negative news flow for the Chinese economy. While the consumer inflation data released earlier today were not quite as bad as expected, the world’s second-largest economy fell into deflation last month. Compared to a year ago, consumer prices retreated by 0.3 per cent in July, marginally less than the 0.4 per cent expected by the markets. Producer prices faced even more significant headwinds last month and recorded a year-on-year decline of 4.4 per cent, worse than the consensus projection of 4.1 per cent.
The data highlighting falling prices in China came only a day after the country reported lower-than-expected exports and imports. The dollar value of Chinese exports declined by 14.5 per cent in July compared to the same month last year, while markets had expected a 12.5 per cent drop. However, the imports delivered the largest disappointment as they fell by 12.4 per cent, considerably more than the five per cent expected.
The inflation and trade data highlighted that the Chinese economy is facing the double jeopardy of falling demand both domestically and in its export markets. The falling prices are likely to put further pressure on domestic activities as consumers may delay spending in order to benefit from further declines. At the same time, the falling exports suggest that the country can no longer rely on overseas demand for continued expansion. The underwhelming data releases fuelled further calls for Chinese authorities to provide more support for the economy, but fiscal and monetary constraints are likely to restrict the room for manoeuvre. Hence, the upside for commodity demand growth can be expected to be limited.
Commodity Markets
After beginning the week in the red, crude oil prices recovered most of Monday’s losses during yesterday’s session. The September Brent futures advanced by 1.0 per cent on Tuesday, settling at 86.17 dollars per barrel, as rising tensions in the Black Sea put a renewed focus on tight global supplies. The contracts have also continued to gain in today’s trading, with prices around half a per cent higher than yesterday’s close.
The European natural gas TTF futures continued to gain yesterday as supply disruptions more than offset easing demand. The front-month contracts advanced by 1.9 per cent and ended the session at 31.07 euros per MWh. Today’s trading has witnessed even more significant gains, with the September futures soaring by more than twelve per cent.
The coal futures for delivery in the Rotterdam area next month recorded a second consecutive session of gains yesterday as higher natural gas prices supported demand. The front-month contracts advanced by 3.5 per cent and settled at 118 dollars per tonne. The Newcastle futures for delivery in September rose by 0.7 per cent to 145.25 dollars per tonne.
After briefly trading below 100 dollars during yesterday’s session, the September iron ore futures listed on the Singapore Exchange ended the day at 100.29 dollars per tonne, a 0.7 per cent decline for the day. The disappointing Chinese trade data contributed to the weaker sentiments. However, expectations of more support for the Chinese economy amid the soft inflation data have contributed to the contracts advancing by more than one per cent in today’s trading.
A stronger dollar and concerns over the Chinese demand outlook weighed on base metal prices yesterday. The three-month aluminium and nickel futures listed on the LME ended the day 1.3 and 1.2 per cent lower, respectively, while the copper and zinc contracts shed 1.6 per cent.
After last week’s extensive losses, the start of the new week has been mixed for the grain and oilseed futures. Yesterday, the September contracts trading in Chicago recorded only minor price moves as rising tensions in the Black Sea offset an improving supply situation elsewhere. The wheat futures shed 0.2 per cent, while the corn and soybean contracts advanced by 0.7 and 0.4 per cent, respectively.
Freight and Bunker Markets
After three sessions of minor gains, the Baltic Dry Index slipped into the red yesterday. While the Panamaxes continued to gain, losses for the Capesizes more than offset that. The headline index retreated by a marginal 0.3 per cent as the sub-index for the Capesizes declined by 2.7 per cent amid weak ordering activities during the early parts of the week. In contrast, the mid and small-sized vessel segments recorded daily gains yesterday. The Panamaxes extended gains into a tenth consecutive session with an advance of 3.6 per cent, as falling supply supported spot freight rates. For the smaller segments, yesterday’s gains were more moderate, with the Supramaxes advancing by 0.4 per cent and the Handysizes recording a daily increase of 0.8 per cent.
For the Baltic’s wet freight indices, only the indicator for the LNG carriers recorded a significant daily move yesterday amid an advance of 13.1 per cent. For the other tanker indicators, the movements were more modest. The dirty tanker index edged up by 0.3 per cent, while the gauges for the clean and the LPG tankers declined by 0.4 and 0.1 per cent, respectively.
Despite rising crude oil prices, most bunker fuels faced headwinds yesterday. The trading in VLSFO and MGO in Singapore recorded daily losses of just over one per cent. In Rotterdam, the former fuel declined by 0.8 per cent, while the latter retreated by 2.2 per cent. However, in Houston, the moves were more modest and mixed, with the VLSFO only marginally lower than on Monday and the MGO advancing by a quarter of a per cent.
The View from the Shipfix Desk
In contrast to recent years, cargo order volumes for bauxite loading globally declined over the course of the second quarter. Under normal circumstances, the forward-looking nature of the data set sees increasing volumes during the second half of the quarter as importers gear up for a rebound in industrial production and aluminium demand during the year's final months. However, sluggish Chinese economic growth has weighed on demand for the vital feedstock for aluminium production, contributing to the lower cargo order volumes.
However, the current quarter has begun strongly, with aggregate volumes during July nearly at par with what was recorded in March. Weekly volumes have also remained robust in the early parts of August. This suggests that elevated demand may be maintained in the near term, with restocking of inventories likely to contribute to the positive development.
After a brief spike in average cargo sizes for bauxite bound for China in the middle of July, the spot trade has shifted away from Capesizes in favour of the mid-sized segments in the past few weeks. As a result, the typical cargo heading for Chinese ports has retreated to below 70,000 tonnes. In contrast, shipments bound for the rest of the world have remained reasonably stable at around 30,000 tonnes.
Data Source: Shipfix