Mixed fortunes across the dry bulk vessel segments contributed to a marginal loss for the Baltic Dry Index yesterday. A solid start to the year for the Capesizes has offset weakness in the mid and small-sized segments. Falling temperatures in parts of the Northern Hemisphere contributed to gains for coal on Thursday. At the same time, iron ore and base metals faced headwinds amid weak Chinese economic data over the past week.
By Ulf Bergman
Macro/Geopolitics
The past few weeks have been challenging for the China bulls. Much of the data released have suggested that the world’s second-largest economy will continue to face significant headwinds. Among other things, the reading for the official PMI for the country’s manufacturing sector fell short of expectations as it retreated to 49.0. Markets had expected a marginal improvement in sentiments, but the gauge's continued decline saw it remain in contraction territory for a third consecutive month in December. In contrast, the non-manufacturing indicator increased last month but remained precariously close to contraction at 50.4. Furthermore, recent data also showed that salaries offered to new hires fell by the most on record, piling further pressure on consumer sentiments and the beleaguered property sector.
In the midst of the rather gloomy data, Caixin’s alternative PMI data delivered some glimmers of hope for the Chinese economy in the near term. The indicators for the manufacturing and non-manufacturing sectors beat consensus expectations and remained in expansion mode. The former edged up marginally to 50.8, and the latter jumped to 52.9, well above the expectations that were broadly in line with November’s reading of 51.5. Still, the generally weak picture painted by recent data is making a case for further support for the Chinese economy, which will be supportive of freight rates and commodity prices.
Commodity Markets
After recovering some of the losses sustained during December’s final week on Wednesday amid rising tensions in the Middle East, crude oil prices lost their positive momentum yesterday. Rising US inventories signalled weaker demand and contributed to the shift in sentiments. The March Brent futures shed 0.8 per cent and ended Thursday’s session at 77.59 dollars per barrel. Still, the contracts have reversed course in today’s trading, with gains of around half a per cent.
Forecasts that the cold weather in Northern Europe will move south have contributed to higher natural gas prices in the continent this week. However, a solid flow of LNG imports and high inventory levels have blunted the impact of the higher demand. The front-month TTF futures gained for a second consecutive session as they settled at 33.41 euros per MWh yesterday, 1.9 per cent above Wednesday’s close. The contracts have also continued to rise in today’s trading, with gains topping three per cent.
The coal prices were also supported by increasing demand amid lower temperatures in the Northern Hemisphere. The Newcastle futures for delivery next month rose by 1.7 per cent, settling at 129.20 dollars per tonne. However, gains were even more extensive in Europe, where the front-month Rotterdam contracts surged by 4.4 per cent to 108.30 dollars per tonne.
Iron ore lost its upward momentum yesterday following three sessions in the black. Still, the February contracts listed on the SGX remained near an eighteen-month high, as traders expected that more Chinese support for the economy would continue to fuel the country’s appetite for imported iron ore. The futures for delivery next month declined by 1.1 per cent, ending the session at 141.14 dollars per tonne. The contracts have continued to slide in today’s session amid losses of around two per cent.
Despite a weaker dollar, base metals faced headwinds yesterday amid weak Chinese economic data in recent days. The three-month copper contracts listed on the LME shed 0.6 per cent, while the aluminium contracts dropped by 1.4 per cent. However, zinc and nickel were the past session’s weakest performers amid losses of around two per cent.
The grain and oilseed futures listed on the CBOT experienced a mixed session on Thursday. The March wheat futures jumped by 2.2 per cent amid reports of high US exports. The corn contracts had less luck and advanced by a quarter of a per cent. In contrast, the soybean futures for delivery in March retreated by 0.7 per cent amid expectations of solid supplies in the coming months.
Freight and Bunker Markets
The Baltic Dry Index has remained close to the levels recorded before the Christmas break, as daily moves in the new year have been modest. However, the developments for the headline index mask the diverging fortunes that the different tonnage segments have faced over the past few days. Strong performance for the Capesizes has offset weakness elsewhere.
Yesterday, the BDI shed 0.2 per cent as the Capesize sub-index continued to rise while the gauges for the smaller segments remained in the red. The freight rate indicator for the largest vessels rose by 2.3 per cent amid robust cargo order volumes, especially in the Atlantic. On the other hand, weak ordering activities weighed on the Panamaxes, with their sub-index dropping by 4.5 per cent. The Supramaxes and Handysizes also continued to face headwinds amid weak demand, with the gauges for the two segments dropping by 2.8 and 3.9 per cent, respectively.
The Baltic Exchange’s wet spot freight indices also had a day of mixed fortunes on Thursday. The index for the dirty tankers rose by 2.5 per cent, with the tensions in the Middle East contributing to the improving sentiments. In contrast, the gauge for the clean tankers declined by 5.1 per cent. The index for the LPG carriers gave up some of the recent days’ gains amid a decline of 1.4 per cent, while the LNG gauge remained unchanged for a second straight day.
After a few days with red dominating the price screens, bunker fuel prices recovered somewhat yesterday despite the downward pressure on crude oil prices. VLSFO advanced by 1.1 per cent in Singapore, while the gains were more significant in Houston and Rotterdam at 1.9 and 2.6 per cent, respectively. For MGO, Singapore led the way higher with a daily increase of 1.9 per cent, while Houston and Rotterdam saw prices moving one per cent higher.
The View from the Shipfix Desk
After an absence of more than one and a half years, China reintroduced tariffs on Russian coal imports at the beginning of the month. The levies were suspended in May 2022 to safeguard against supply disruptions in the wake of the Russian invasion of Ukraine. Since then, Russia has solidified its position as China’s second-largest supplier of the dirtiest of fossil fuels. However, rising domestic production has led to the reintroduction of the tariffs as Beijing seeks to protect the country’s miners against falling prices amid excessive supplies.
Unlike the Russian supplies, coal imports from Indonesia and Australia are exempt from tariffs amid bilateral free trade agreements. Hence, Chinese imports from its northern neighbour may face headwinds in the coming months unless the Russian miners lower their prices further.
Chinese imports of Russian coal over the past year are likely to have reached 100 million tonnes. However, after a peak in June, monthly import volumes trended lower throughout the remainder of the year as Russia’s price advantage came under pressure. Shipfix’s forward-looking cargo order data recorded robust volumes during the early parts of the year, correctly predicting the high imports during the first half of the second quarter.
Following a limited rebound during the third quarter, cargo order volumes for Russian coal bound for China trended lower during the year's final months. The development suggests that actual Chinese imports of Russian coal will continue to decline in the coming months. The weaker demand for seaborne transportation of Russian coal to Chinese ports has weighed heavily on ordering activities for cargoes from Russia’s Far East, with spot volumes dropping to 1.9 million tonnes in December. However, it has also led to a virtual collapse in demand for shipments from more distant Russian shores.
The weaker order volumes have affected all vessel segments negatively, with the effective disappearance of the longer voyages adding to the decline in tonne-mile demand. However, should the reintroduction of the tariffs lead to Chinese buyers sourcing more of their coal in Indonesia and Australia, the impact on freight rates is likely to be limited.
Data Source: Shipfix