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Macro Macchiato 09/09/19: London International Shipping Week

Macro data are looking a bit wobbly this week. What will that do to shipping markets?

US jobs data for August were released on Friday. A total of 130,000 new jobs were created, which was about 20,000 below expectations. It was still a very positive number, though the Cassandras pointed to the addition of just 3,000 manufacturing jobs. After another round of US tariffs on Chinese exports, fears are growing that we are headed for a global recession. Manufacturing data for August were negative for all the major Asian economies: China, India, Japan, South Kore and Taiwan as well as from Myanmar, the Philippines and Thailand. Germany and the eurozone are teetering on the brink of recession, and the basket-case UK probably is in a recession. In Latin America, Argentina is partial sovereign default and in Brazil, Mr Bolsonaro is struggling to push through his reforms.

Meanwhile the Baltic Dry Index is at its highest level for ten years. As the BDI is seen to be a bellwether of the global manufacturing base, why is it pointing in the opposite direction to the macro indicators? There will be plenty of theories about during London International Shipping Week this week. I’ve discussed here before my belief that much of the rise in the BDI is due to the removal of production caps on important Chinese steel manufacturers, combined with the Brazilian ore outages. That combination pushed Chinese iron ore buyers to alternative suppliers, and that disruption has driven up the dry bulk markets. The extra Chinese steel seems to be going into the construction sector as the Chinese government relaxes lending rules to keep the economy growing. It may be a bubble, but the dollars are real for now.

China’s National Development and Reform Commission reports that flat glass and cement output rose by 7.2 and 7.0 per cent respectively during the first seven months of 2019. It also reports a 37.8 per cent increase in fixed asset investment in the ferrous smelting and processing sector for the same period compared to 2018. Chinese steel mills have increased production by 48 Mn T this year, of which only 200,000 T has been exported, with most of the rest destined for the construction sector. There have been signs of a slow-down, with land purchases by Chinese property developers down by nearly 30 per cent year on year. At last week’s State Council meeting, China’s Prime Minister Li Keqiang urged the “timely use” of cuts to bank deposit reserve ratios. With China’s manufacturing sector in technical contraction, the government will be keen to pull the fiscal and monetary levers to keep the economy growing.

While the dry bulk market enjoys its bull run, the tanker market remains in the doldrums and macro indicators have no short-term joy to offer. On Friday, BP reported that global oil consumption will grow by less than one per cent in 2019. With oil consumption running at about 100 Mn bpd, that equates to less than 1 Mn bpd growth, the lowest since 2014 when the tanker markets were under water. The lower consumption figures tally with shrinking expectations for GDP growth, with the World Bank expecting only 2.6 per cent global GDP growth this year compared to 3.0 per cent last year. The immediate effects on the oil markets are lower expectations for oil prices. That’s good for consumers, but it also probably presages production cuts by OPEC and maybe Russia, as well as slower rig activity in the US shale fields. Those acts in turn will reduce the quantity of barrels for export by sea.

It may be a good time to hedge the divergent short-term destinies of dry and liquid bulk freight, but what about container markets? According to the Freightos container index. The gentle upward movement in the global average FEI rate continues from a low USD 1,280 at the end of March to USD 1,396 on 6th September. Let’s see how peak season develops because last year there was a jump from around USD 1,550 to USD 2,000 just in August followed by a further rise to USD 2,350 in September. So far this year, there is no evidence of the peak.

The Take Away

The consensus is that Mr Trump’s trade war with China is doing the entire world a disservice. Manufacturing investment and activity are down, though the much larger service sectors in the West are still buoyant. There are wobbles in construction markets where they are important such as in the UK and China. How does this affect shipping? The dry freight markets appear to be positional, based on changes to Chinese steel production caps and earlier Brazilian mining outages. Slower tanker and container markets appear to be based more on fundamentals. Slower global economic growth equates to weaker oil consumption growth and a flatter container shipping peak season. Still, weaker freight markets may be an opportunity to buy cheaper tonnage, if you can get the finance. And that brings me to my invitation to you to join me at the ICS London and South East Branch LISW Seminar this Wednesday, titled “International shipping finance: where is the money coming from?” For details click here.

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