The Baltic Dry Index remained in the red yesterday as all vessel segments retreated amid soft demand in the major basins. Optimism over the demand outlook fuelled significant gains for iron ore and coal, while disappointing manufacturing data for the US and China weighed on crude oil and copper prices.
By Ulf Bergman
Macro/Geopolitics
As widely expected, the Federal Reserve left interest rates unchanged on Wednesday. However, the statement by the central bank’s Chair, Jerome Powell, signalled an increasing likelihood of a cut at the next meeting in September. At this stage, it appears that only a reversal of the decline in inflation could derail the momentum towards monetary easing in a month’s time. Still, some investors fear that the Fed has kept interest rates too high for too long, damaging long-term growth prospects and the potential for a so-called soft landing.
Such fears will likely gain traction following yesterday’s release of PMI data for the US manufacturing sector. While markets had expected that the gauge would remain in contraction, the consensus pointed towards a minor improvement from the 48.5 recorded in June. Instead, the PMI fell to 46.8, the lowest since November last year. The lower-than-expected reading will make an interest rate cut easier next month, especially as the PMI employment indicator for the manufacturing sector dropped to the lowest level since June 2020.
Following Wednesday’s release of the official Chinese Purchasing Managers’ Indices, Caixin’s alternative gauge for the manufacturing sector was published yesterday. While the official manufacturing PMI was broadly in line with expectations and the past month’s reading, Caixin’s indicator delivered an unexpected drop. Markets had been anticipating a minor retreat from June’s 51.8, but the PMI dropped to 49.8 and contraction territory. In recent months, Caixin’s PMI has been more bullish about the Chinese economy than the official gauge, but the latest reading changed that as it dipped into contraction for the first time since October last year. Among the factors weighing on the alternative PMI was deteriorating conditions for the country’s small export companies, which could signal further headwinds for the world’s second-largest economy during the year's second half.
Commodity Markets
After gaining considerable ground on Wednesday, crude oil prices continued to climb during the early parts of yesterday’s trading session. Mounting tensions in the Middle East fuelled concerns over supplies and supported higher prices. However, weaker-than-expected US ISM data fuelled unease over future demand, offsetting fears over supply disruptions. As a result, the October Brent futures retreated and ended the day at 79.52 dollars per barrel, 1.6 per cent below Wednesday’s close. The contracts have reversed course in today’s session with gains of around half a per cent.
European natural gas prices rose for a fifth consecutive session on Thursday amid supply concerns as tensions in the Middle East continued to rise. In addition, an increasing portion of US LNG shipments is heading to the more lucrative Asian market, threatening the continued build-up of European inventories. The front-month TTF futures rose by 3.1 per cent, settling at 36.97 euros per MWh. However, some of yesterday’s gains have been reversed in today’s trading amid losses of approximately 1.5 per cent.
Increasing demand, supported by higher natural gas prices, saw coal prices moving higher yesterday. The September futures for delivery in Newcastle rose by 1.7 per cent and ended the day at 143.80 dollars per tonne, the highest since the beginning of June. The bullish market sentiments also pushed the contracts for delivery in Rotterdam significantly higher, which settled at 120.80 dollars per tonne following a 3.4 per cent gain for the day.
Iron ore continued to recover following Tuesday's four-month low, fuelled by an optimistic demand outlook from top producer Rio Tinto. The September SGX futures rose by 1.7 per cent, ending the day at 102.65 dollars per tonne. The contracts have continued to recover in today’s trading amid gains in the region of 1.5 per cent.
The base metals had a mixed session, with weak US and Chinese manufacturing data and a stronger dollar weighing on the copper and nickel futures listed on the LME. The three-month contracts for the two metals retreated by 1.9 per cent. In contrast, sentiments remained bullish for aluminium and zinc amid the rising prospects of a US interest rate cut next month. The aluminium three-month futures rose by a quarter of a per cent, while zinc delivered the session’s best performance, with a gain of 1.2 per cent.
The September wheat futures listed on the CBOT delivered modest gains for a second consecutive session on Thursday. Still, the contracts remained close to the recent four-year low amid abundant global supplies. On the other hand, the corn and soybean contracts remained under pressure as soft demand and robust supplies continued to weigh on prices. The September soybean futures declined by 0.5 per cent, while the corn contracts shed 0.2 per cent.
Freight and Bunker Markets
The Baltic Dry Index retreated for a tenth consecutive session on Thursday, with all segments contributing to the headwinds to a greater or lesser extent. Still, in line with the recent narrative, much of the 2.3 per cent decline for the headline gauge originated in the capesize segment.
The indicator for the largest segment declined by 3.7 per cent yesterday as demand in the Atlantic basin remained soft. The index for the panamaxes fell by 1.5 per cent amid weak cargo order volumes across the major basins. The gauge for the supramaxes shed 0.8 per cent as downward pressure on tonnage supply offset some of the adverse effects of weak demand. The index for the handysizes edged down marginally amid a loss of 0.1 per cent.
Yesterday, no gains were recorded for the Baltic Exchange’s wet freight indices as demand remained soft. The dirty and clean tanker indices declined by 1.2 and 2.3 per cent, respectively. The spot gauge for the LPG carriers shed 2.0 per cent, while the indicator for the LNG tankers remained unchanged for a second consecutive session.
Despite downward pressure on crude oil, bunker fuel prices rose across the leading maritime hubs during Thursday’s trading activities. The VLSFO rose by 1.2 per cent in Singapore and Rotterdam, with Houston marginally behind. Singapore led the way higher in the MGO trading amid a gain of 1.3 per cent for the day, while Houston and Rotterdam recorded increases of 1.1 per cent.
The View from the Shipfix Desk
The latest batch of Chinese PMI data suggests that the world’s second-largest may face mounting challenges during the second half of the year. A considerably weaker-than-expected reading for the Caixin manufacturing PMI saw it move broadly in line with the official gauge, implying a contraction for Chinese industrial production.
Given the different set-up for the alternative PMI, the unexpected drop into contraction territory is probably quite worrisome for the Chinese leadership as it indicates that the country’s exports are facing headwinds. The country’s export-oriented manufacturing sector has acted as an offset for sluggish domestic demand amid problems in the country’s property sector and disinflationary pressures. Hence, any suggestions of weaker exports will raise warning signals that the official growth target of five per cent may drift out of reach.
Rising headwinds for the Chinese economy are likely to affect the seaborne flow of commodities to the country’s ports. While new stimulus packages for the economy could fuel demand for raw materials such as iron ore, base metals and coal, recent developments suggest that the Chinese leadership is reluctant to embark on massive spending programmes. In any case, the efforts to stimulate economic expansion since China emerged from its draconian COVID-19 control measures have failed to deliver anything near the growth rates of yesteryears.
While Chinese seaborne coal imports have been affected by several structural issues, such as increasing electricity production by hydropower and rising imports from Mongolia, economic headwinds will add additional pressure on the volumes passing through the country’s ports. After a robust start to the year, with total cargo order volumes for coal bound for China in line with the aggregate for the same period last year, the past two months have seen a considerable shift.
Weekly cargo order volumes have been trending lower since the beginning of June, with shipments from Indonesia taking the brunt of the declining demand. The past two months have seen demand drop by around 40 per cent compared to last year. In addition, unlike this year, cargo order volumes trended higher throughout June and July last year. Hence, the coming months look set to see Chinese coal imports retreat from the levels recorded in recent months.
Data Source: Shipfix