Chinese economy will continue to face headwinds

Continued headwinds for the capesizes over much of the past week contributed to the Baltic Dry Index recording a third consecutive week of losses. However, contrary to recent weeks, the midsized segments also declined. Among the commodities, iron ore and coal recovered some lost ground amid a rebound in demand.

By Ulf Bergman

Macro/Geopolitics 

As highlighted in Friday’s edition of “The Fix”, some investors fear that the Federal Reserve has left interest rates too high for too long, harming long-term growth. Friday’s release of US labour data certainly contributed additional fuel to this narrative. According to data released by the US Bureau of Labor Statistics, the world’s largest economy added 114,000 jobs last month, well below the downwardly revised 179,000 in June and the consensus projection of 175,000. As a result, the US unemployment rate rose to 4.3 per cent, the highest in nearly three years. 

The weaker-than-expected jobs data weighed on the US dollar on Friday, with the dollar index dropping by 1.1 per cent. In addition, the mounting headwinds for the US labour markets have raised fears of a US recession globally and contributed to today’s equity market rout. While a weaker dollar could theoretically support commodity prices, the prospects of a US recession are likely to more than offset this and weigh on demand and prices.

Commodity Markets

Crude oil spent much of the past week in the negative territory, as concerns over demand outweighed mounting tensions in the Middle East and put pressure on prices. The October Brent futures recorded a weekly decline of 4.3 per cent, ending Friday’s session at 76.81 dollars per barrel. Friday’s weak US labour data have continued to weigh on prices in today’s trading amid losses of around one per cent.

While European natural gas prices ended last week on a negative note amid minor losses on Friday, increasing competition for global LNG cargoes resulted in significant weekly gains. The front-month TTF futures recorded a weekly loss of 9.9 per cent, settling at 36.65 euros per MWh on Friday. However, the contracts have been caught up in today’s global sell-off and retreated by more than three per cent. 

An improving demand outlook and higher natural gas prices supported coal last week. The Newcastle September futures advanced by 4.3 per cent last week, ending Friday’s session at 145.75 dollars per tonne. The contracts for delivery in Rotterdam next month fared even better amid a 6.9 per cent weekly gain and settled at 122.20 dollars per tonne at the end of the week. 

After dropping below the symbolic 100-dollar level during the past week, mounting optimism that the Chinese leadership will provide additional measures to support the world’s second-largest economy contributed to iron ore prices recovering during the week’s final three sessions. The September futures listed on the SGX ended Friday’s trading at 103.81 dollars per tonne, 1.8 per cent higher than a week earlier. Despite the global headwinds in the wake of the US jobs data, the contracts initially continued to gain in today’s trading but have since dropped in the red.  

The base metals endured a volatile week amid a changeable demand outlook and concerns that markets are oversupplied. The three-month copper and zinc LME futures recorded weekly declines of 0.6 per cent, while the aluminium contracts shed 1.1 per cent. On the other hand, the nickel futures recorded a weekly gain of 3.0 per cent, despite losses on Thursday and Friday.   

The grain and oilseed futures listed on the CBOT experienced mixed fortunes during the past week. The September wheat futures recorded a weekly gain of 3.0 per cent amid stronger demand but remained close to the recent four-year low. On the other hand, ample supplies weighed on the soybean and corn September futures, which declined by more than two per cent last week.

Freight and Bunker Markets 

Despite a positive end to the week amid a daily gain of 0.4 per cent on Friday in the wake of a rebound for the capesizes, the Baltic Dry Index recorded a weekly decline of 7.4 per cent. While the largest vessels had a positive session on Friday, they nevertheless provided much of last week’s downward momentum for the headline index.  

The sub-index for the capesizes recorded its first gain in over two weeks amid a 1.7 per cent advance, but despite the modest rebound, the gauge fell by 11.0 per cent over the week. The weekly retreat was fuelled by rising tonnage supply and soft demand in the Atlantic. The freight gauge for the panamaxes declined by 4.9 per cent last week as cargo order volumes stayed subdued across the major basins. The indicator for the supramaxes retreated by 3.2 per cent as a minor decline in tonnage availability tempered weak demand. The index for the handysizes recorded minor daily gains and losses and ended the week unchanged.  

Declines also dominated the Baltic Exchange’s wet freight indices last week. Soft demand contributed to the dirty and clean tanker gauges recording weekly losses of 6.9 and 7.2 per cent, respectively. The gauge for the LPG carriers dropped by 8.1 per cent, but the index for the LNG tankers recorded a modest weekly gain of 0.7 per cent.  

Last week’s volatility in the crude oil markets contributed to price swings and mixed fortunes for the bunker fuels. The VLSFO recorded weekly gains in Singapore and Rotterdam of 1.1 and 0.3 per cent, respectively, while retreating by 2.5 per cent in Houston. In contrast, the MGO declined in all of the maritime hubs. Houston led the way lower with a weekly decline of 4.3 per cent, while the fuel shed 1.6 per cent in Singapore and 1.2 per cent in Rotterdam.

The View from the Shipfix Desk

The weaker-than-expected Chinese manufacturing PMI data published last week highlighted the challenges facing the world’s second-largest economy. With both the official and the alternative Caixin Purchasing Managers’ Indices for the country’s manufacturing sector in contraction territory, there are suggestions that the official growth target for the year may not be met. 

 Even if the year’s growth target is eventually fulfilled, an economic expansion of around five per cent remains modest compared to the rates seen in the past. While it was always inconceivable that the Chinese economy could maintain exceptional growth as it developed, much of the recent headwinds are due to the ongoing problems in the country’s real estate sector and sluggish domestic demand growth. 

 Following the release of weak US labour data on Friday, the US dollar has come under significant pressure amid mounting fears that the world’s largest economy may not achieve a soft landing and may drift into a recession instead. The depreciation of the greenback could make commodities cheaper for Chinese buyers and fuel an uptick in demand. Still, recent developments in order volumes for dry bulk cargoes discharging in Chinese ports indicate that the country’s appetite for overseas dry bulk commodities is weakening. Hence, any increase due to a weak dollar starts from a low base. 

 Weekly cargo order volumes for dry bulk commodities due for discharge in Chinese ports have steadily declined since the beginning of May. While the data excludes shipments covered by longer-term agreements, the spot market data show weakness compared to the same period last year. The aggregate for July was more than thirty per cent lower than a year ago, while June recorded a nine per cent year-on-year decline. Hence, the forward-looking nature of the cargo order data suggests that the Chinese economy will continue to face headwinds.

Data Source: Shipfix