Continued headwinds for the capesizes weighed on the Baltic Dry Index last week, which declined by nearly five per cent. Among the commodities, a combination of weak demand and robust supplies contributed to most ending the past week in the red. Still, concerns over supply disruptions delivered gains for coal and natural gas.
By Ulf Bergman
Macro/Geopolitics
After the disappointing outcome of last week’s Third Plenum, the Chinese leadership surprised markets yesterday by reducing interest rates. The consensus among pundits suggested that the Chinese central bank would leave interest rates unchanged for an eleventh consecutive month. However, the one-year and five-year prime interest rates were cut by ten basis points. The former is often used as the benchmark for corporate and household loans, while the latter usually serves as a reference for mortgages. While the reduction in interest rates is unlikely to change the dynamics of the world’s second-largest economy fundamentally, markets have nevertheless seen it as a recognition that more needs to be done to meet the official growth target.
The move will likely weigh on the Chinese yuan in the short term as the interest rate differential with the US has increased. As a result, Chinese imports are likely to remain under pressure in the coming months. However, once the Federal Reserve commences its monetary easing, likely in September, the Chinese currency should recover and, at the same time, provide the Chinese central bank with more room for manoeuvre.
Commodity Markets
Mounting optimism over a ceasefire in Gaza, a stronger dollar and concerns over the Chinese demand outlook amid a lack of new stimulus packages following the Third Plenum weighed on crude oil prices last week. The September Brent futures ended the week at 82.63 dollars per barrel, 2.9 per cent below the previous Friday’s closing price. The weekly decline put the contracts at the lowest level since the middle of June. After initially remaining stable in today’s trading, the contracts have resumed their retreat amid losses of around one per cent.
European natural gas prices swung between daily gains and losses over the past week as concerns over supplies and soft demand competed for traders’ attention. Despite a 1.5 per cent decline on Friday, the front-month TTF futures recorded a weekly increase of 1.4 per cent, ending at 32.17 euros per MWh. Today’s trading has seen the contracts fall by more than one per cent as operations at the Freeport LNG plant in Texas resumed following a shutdown when Hurricane Beryl made landfall earlier in the month.
Concerns that La Nina will disrupt shipments in the coming months and rising natural gas prices boosted coal demand last week and supported prices. The August futures for delivery in the Australian port of Newcastle recorded a weekly gain of 2.7 per cent as they settled at 139 dollars per tonne on Friday. The contracts for delivery in Rotterdam next month ended the week at 108.65 dollars per tonne, following a weekly increase of 3.6 per cent.
The lack of any new programmes supporting the Chinese economy emerging from the Third Plenum weighed on iron ore prices last week as the demand outlook darkened amid economic headwinds. The SGX futures for delivery in August declined by 3.2 per cent over the past five trading sessions, settling at 104.52 dollars per tonne on Friday. The lower Chinese interest rates have failed to improve sentiments in today’s session, with the contracts trading around one per cent below Friday’s close.
The base metals suffered last week amid soft demand and well-supplied markets. The three-month copper and zinc futures listed on the LME declined by 5.7 per cent over the past week, while the aluminium contracts shed 5.2 per cent. The headwinds for the nickel futures were somewhat lighter and resulted in a weekly loss of 3.7 per cent.
The September wheat futures listed on the CBOT had a mixed week, with two days of robust gains. Still, the contracts recorded a weekly decline of 1.5 per cent as an inflow of newly harvested wheat weighed on prices. The corn contracts had a volatile week but ended the week on a multi-year low, following a weekly decline of 2.9 per cent, as demand remained lacklustre in a well-supplied market. The soybean futures shed 2.1 per cent over the past week amid rising inventories.
Freight and Bunker Markets
Following limited gains during the previous week, the Baltic Dry Index spent most of the past five sessions in the red, resulting in a weekly decline of 4.8 per cent. The capesizes provided the downward pressure on the headline index, while the smaller segments delivered limited offsets.
The sub-index for the largest vessels recorded a weekly decline of 9.8 per cent, extending losses into a third consecutive week. Downward pressure on demand in the Atlantic and the Pacific, combined with rising tonnage in the latter basin, weighed on freight rates. On the other hand, the gauges for the mid and small-sized vessels delivered modest weekly gains. The indicator for the panamaxes rose by 2.1 per cent as demand became increasingly focused on tonnage for delivery in the near term. The sub-indices for the supramaxes and handysizes recorded weekly increases of 0.7 and 1.5 per cent, respectively.
Most of the Baltic Exchange’s wet freight indices ended the past week in the red. The gauge for the dirty tankers shed 0.8 per cent over the past five sessions, while the clean equivalent dropped by 3.2 per cent amid weak demand. The spot indicator for the LPG carriers fell by 7.5 per cent, but the gauge for the LNG tankers went against the flow and delivered a half a per cent gain for the week.
Declining crude oil prices weighed on the trading in bunker fuels last week, with the VLSFO and the MGO recording weekly losses across the world’s leading hubs. The VLSFO declined by 0.9 per cent in Singapore last week, while losses were somewhat more significant at around 1.5 per cent in Houston and Rotterdam. For the MGO, Houston delivered the most sizeable weekly decline with a drop of 4.0 per cent. Still, losses in Singapore and Rotterdam were also significant at 1.3 and 2.8 per cent, respectively.
The View from the Shipfix Desk
Despite some volatility during the past week, the grains and oilseeds futures are trading at, or near, the lowest levels since 2020. While prices generally have been trending lower since 2022, the decline has accelerated since the latter parts of May. Over the past two months, the September wheat contracts have dropped by nearly 25 per cent, while the soybean and corn contracts have shed approximately fifteen and nineteen per cent, respectively. A bullish outlook for the global supply situation contributed to the downward pressure on prices since May, but lacklustre demand in some cases has also weighed on prices.
Like many other commodities, China is a dominant importer of grains and oilseeds. Hence, any changes to Chinese demand for imports of agricultural commodities could have a significant impact on global prices.
Cargo order volumes for agricultural commodities discharging in Chinese ports have been trending lower since March. While the year started strongly, with cargo order volumes well above what was observed during the same period last year, the monthly aggregates for May and June failed to match the readings for the same months in 2023. In addition, with more than half of July behind us, the current month looks set to fall well below the volumes seen a year ago. Hence, unless Chinese demand recovers in the very near future, the depressed cargo order volumes suggest that grain and oilseed prices will continue to face headwinds in the near term.
Data Source: Shipfix