The Baltic Dry Index recorded a minor gain last week, with the panamaxes chiefly responsible for the positive development as the gauge for the capesizes retreated. Among the commodities, a combination of weaker demand and robust supplies contributed to red dominating the trading screens during the past week.
By Ulf Bergman
Macro/Geopolitics
The Chinese economy failed to live up to expectations during the second quarter. According to data released yesterday, the world’s second-largest economy expanded by 4.7 per cent over the past three months compared to the same period last year. The quarterly growth was the weakest since the beginning of last year and a significant deceleration from the 5.3 per cent recorded during the year’s first three months. Markets had been projecting a 5.1 per cent expansion.
The headwinds for the Chinese economy were fuelled by continued pressure on domestic demand amid the ongoing crisis in the country’s real estate sector. While the Chinese export sector continues to do well, with industrial production beating expectations and growing by 5.3 per cent last month, retail sales in the country rose by 2.0 per cent in June and fell well short of the consensus projection of 3.3 per cent. The continued disparity between the export-oriented industry and the domestic demand situation highlights the challenges facing the country’s leadership as they meet for the Third Plenum this week.
While an absence of economic stimulus is likely to have seen the Chinese economy in a worse shape, it is becoming increasingly evident that the measures put in place so far remain inadequate. Hence, further steps need to be taken to meet the official growth target of five per cent for the current year. However, the extensive problems facing the country’s real estate sector suggest that there is no quick and easy solution, with growth rates likely to remain under pressure for the foreseeable future.
Commodity Markets
After four weeks in the black, crude oil prices declined over the past five trading sessions amid signs of easing tensions in the Middle East and concerns over the global demand outlook. The September Brent futures recorded a weekly decline of 1.7 per cent, ending Friday’s session at 85.03 dollars per barrel. The new week has seen the contracts remain close to Friday’s closing price.
High inventory levels and soft demand weighed on European natural gas prices during the past week. Despite gains on Thursday and Friday, the front-month TTF futures recorded a weekly decline of 4.1 per cent, matching the preceding week’s losses. Following a 2.0 per cent gain on Friday, the contracts ended the week at 31.72 euros per MWh. The contracts have resumed their decline during today’s trading session amid losses of around one per cent.
The front-month coal futures for the Asian and European markets declined last week amid weaker demand from the world’s largest importers and declining natural gas prices. The futures for delivery in the Port of Newcastle in August shed 1.5 per cent, ending the week at 135.35 dollars per tonne. Despite gaining 2.0 per cent on Friday, the Rotterdam contracts for delivery next month retreated by 2.0 per cent over the week and settled at 104.90 dollars per tonne.
The August iron ore futures listed on the SGX ended Friday’s session broadly unchanged at 108.01 dollars per tonne. Still, the contracts recorded a weekly decline of 2.1 per cent as the demand outlook darkened amid weak Chinese import data, signalling continued headwinds for the world’s second-largest economy and preeminent buyer of the steel-making ingredient. The new week has begun with the futures recording limited gains amid hopes of more economic stimulus following the week’s Third Plenum session in China.
A weaker dollar failed to offset a darkening demand outlook and rising inventory levels for the base metals. The three-month copper futures listed at the LME recorded a weekly decline of 0.7 per cent, while the aluminium and zinc contracts dropped by around two per cent. The nickel futures delivered the week’s weakest performance amid a 2.8 per cent drop.
Lacklustre demand and ample global supplies weighed heavily on the grain and oilseed futures listed on the CBOT during the past week. The September wheat and soybean contracts dropped by 6.7 and 6.0 per cent, respectively, while the corn futures shed a more modest 2.1 per cent over the week.
Freight and Bunker Markets
The Baltic Dry Index staged a minor rebound last week as the fortunes for the panamaxes shifted. The mid-sized segment delivered a robust weekly performance and contributed to a 1.6 per cent gain for the headline index.
Despite a recovery during the second half of the week, the indicator for the capesizes recorded a weekly decline of 1.3 per cent as a rise in tonnage supply in the Atlantic during the early parts of the week weighed on the overall performance. After three weeks of losses, the gauge for the panamaxes gained 8.5 per cent over the past five sessions, with rising cargo order volumes in the Pacific basin and downward pressure on tonnage supply in the Atlantic and the Pacific contributing to the turnaround. Amid limited daily gains during much of the week, the sub-index for the supramaxes recorded a weekly gain of 2.2 per cent, with pressure on tonnage supply in the Pacific and the Indian Ocean contributing to the gains. The indicator for the handysizes ended the week broadly unchanged as lower tonnage supply offset weaker demand.
The Baltic Exchange’s indices for wet freight had a week of diverging fortunes. The gauge for the dirty tankers declined by 3.4 per cent amid concerns over demand, while the indicator for their clean siblings rose by 3.3 per cent. The spot index for the LNG carriers recorded a weekly gain of 1.0 per cent, while the LPG freight gauge dropped by 19.2 per cent.
While the trading in bunker fuels ended the week on a positive note amid limited gains on Friday, the pressure on crude oil prices over the past five sessions contributed to weekly losses in most locations. The VLSFO declined by 2.0 per cent over the week in Singapore and 0.8 per cent in Rotterdam but ended the week unchanged in Houston. The MGO recorded weekly drops of 2.6 and 2,8 per cent in Singapore and Houston while retreating by 1.8 per cent in Rotterdam.
The View from the Shipfix Desk
Global cargo order volumes for the supramaxes and ultramaxes have been under pressure during the past few months. Demand has faced headwinds across all of the major basins. Still, the situation in the Atlantic has stabilised recently, and the month-on-month decline in June was smaller than in the Indian Ocean and the Pacific. Still, the downward trend for demand over the past months appears to have come to an end. As highlighted in “The Fix” last Wednesday, weekly cargo order volumes have been showing tentative signs of a recovery since the middle of June.
In the Atlantic basin, the aggregate cargo order volume for the month to date has reached 31 million tonnes, putting it on track to surpass the total for June. Such a development would match last year's pattern when July was the start of a significant recovery for demand that accelerated until November.
A contributing factor to the upward trend for cargo order volumes in the Atlantic basin during last year’s second half was robust demand for seaborne transportation of agricultural commodities from ports in the US Gulf. While it is still early days for ordering activities related to the US harvest season, the current levels and recent developments suggest that a repeat of last year’s pattern is highly probable.
An increase in tonnage supply in the US Gulf is likely to offset the recent rise in demand and negate positive effects on freight rates in the short term. However, a recent decline in market lead times for cargoes loading on supramaxes in the US Gulf suggests that demand is shifting towards more immediate deliveries of vessels. Hence, the trade in agricultural commodities from the southern US ports may support higher freight rates in the not-too-distant future.
Data Source: Shipfix