In this episode of Freight Up, we tackle the major shifts and trends in the freight and bulk commodity markets that have unfolded over the last two weeks.
I'm Jess, and together with Davide, we'll guide you through the latest developments, featuring insights from our guests, Hao Pei, and Archie Smith.
If you're keen to understand the dynamics currently shaping iron ore, steel, and fuel oil, this episode is essential listening.
We'll kick things off with an update on the economic indicators from major markets like the UK, Japan, and Germany.
You'll learn how inflation trends are diverging in these countries and the implications for global trade.
Moving forward, we delve into manufacturing activities in China and the U.S., examining their impact on the freight indices.
We'll break down the significant downturn in shipping indexes, detailing the struggles faced by the Capesize, Panamax, Supramax, and Handysize segments.
By focusing on these movements, you'll gain a clearer picture of the pressure points in global shipping.
We'll discuss the turmoil in the dry bulk market, especially the surprising drop in freight rates during what is typically a peak period because of China's year-end restocking.
We'll address the role of geopolitical events, such as the typhoon in China, and market holidays like Thanksgiving in the U.S., that have contributed to market sluggishness.
With Hao Pei's expert take on global steel tariffs and China's internal housing market stimuli, and Archie Smith's deep dive into the high sulphur fuel oil market shifts, you'll come away with actionable insights.
By listening to this episode, you'll be equipped to make informed decisions, anticipate market movements, and leverage the latest trends in the freight and commodity markets.
Don't miss out on these critical updates that can shape your strategies in the weeks to come.
[00:00:03] Hello and welcome back to Freight Up, the freight and commodity podcast of Freight Investor Services. My name is Jess and together with Davide, we'll be your hosts as we navigate the major freight and bulk commodity markets.
[00:00:13] Hello everyone. Winter is here and we can already see some Christmas trees around here in London. So today we'll begin with our usual freight update, followed by insights from HowPay on iron ore and Archie's meat and fuel oil. But as usual, let's first look at the latest news and index movements of the last two weeks.
[00:00:33] Let's dive into the latest inflation trends. In the UK, the annual inflation rate surged to 2.3% in October, its highest in six months, up from 1.7% in September. This increase not only surpassed the Bank of England's target but also exceeded market expectations of 2.2%.
[00:00:49] Now shifting to Japan, the story is quite different. Japan's annual inflation rate eased to 2.3% in October, down from 2.5% in the previous month.
[00:00:59] This marks the lowest reading since January and signals a cooling of price pressures.
[00:01:04] Meanwhile, in Germany, inflation climbed to 2.2% in November compared to 2% in October. While this represents a four-month high, it fell just short of the market expectations of 2.3% according to the preliminary data.
[00:01:17] Now let's pivot to the manufacturing activity. In China, the Kaixin General Manufacturing PMI rose to 51.5% in November, up from 50.3% in October.
[00:01:28] This exceeded the forecast of 50.5% and marked the fastest expansion in factory activity since June, with foreign orders growing at their strongest pace since February 2023.
[00:01:39] Over in the US, the ISM Manufacturing PMI ticked up to 48.4% in November from 46.5% in October.
[00:01:47] While still signaling a contraction in the sector, it beat market expectations of 47.5% and showed signs of softer downturn.
[00:01:56] What about the market movements of the last two weeks? Let's take a quick look.
[00:02:01] Over the past two weeks, it's been a tough ride for the shipping indexes with all the major segments losing ground.
[00:02:07] Let's break it down.
[00:02:09] Cape sizes took a significant hit.
[00:02:11] The C5TC index plumed from $23,291 on the 19th of November to just $14,863 on the 3rd of December, making a sharp decline.
[00:02:23] Panamaxes also faced headwinds as the P5TC index dropped from $10,536 two weeks ago to $9,042 as of yesterday.
[00:02:34] The Supermax segment wasn't spared either.
[00:02:37] The S10TC index slipped to $10,344 yesterday, down from $10,596 two weeks prior.
[00:02:45] And finally, for the smaller handy sizes, the HS7TC index softens slightly, going from $12,207 to $11,759 over the same period.
[00:02:59] It's clear that the market is feeling pressure across the board with each segment showing declines.
[00:03:05] So Jess, let's have a look at what has happened in the dry FFA market.
[00:03:11] Okay, so if we look at the latest developments in the reporting week between November the 26th to December the 3rd,
[00:03:17] we see that the dry bulk market has faced significant downward pressure with rates for both the Cape size and Panamax vessels falling to their lowest levels in over a year.
[00:03:25] This is of note as we typically see a seasonal boost during this time of year due to the end of year restocking by China for iron ore and other bulk commodities.
[00:03:33] However, that expected support hasn't really materialised as expected, though iron ore futures did rise over this last reporting week,
[00:03:42] supported by some upbeat factory data from China.
[00:03:45] I think Haupai might go into this later on.
[00:03:47] Typhoon Doxori, I hope I haven't butchered that, which blew through China last week, created a bit of a damper on the demand.
[00:03:54] The typhoon led to severe flooding in Beijing and caused significant disruptions across southeast China ports and closed some factories.
[00:04:01] In the Atlantic market, activity was muted due to the US Thanksgiving holidays, amongst other things,
[00:04:07] and coal shipments also declined week on week, further exasperating this bearish sentiment.
[00:04:11] On the positive side, Russian wheat exports reached record highs between July and November, leading some support to the bulk carrier demand.
[00:04:20] Another notable trend was Cape size cargoes being split into Panamax and shipments.
[00:04:25] So, one Cape size cargo would be split between two Panamax ships because of the latter's lower rates.
[00:04:33] This may have contributed to Cape size rates falling so dramatically over the last week in a bid to remain competitive.
[00:04:39] Adding to the turbulence, a major fund recently stopped out of its positions, creating some downward pressure on rates across the curve.
[00:04:48] What about Capes more specifically?
[00:04:49] So, a quick summary of the last week's rates.
[00:04:52] The Cape size market was particularly volatile last week.
[00:04:55] On Tuesday, November 26th, it saw the December contracts fall from $21,600 to $20,350,
[00:05:04] though Wednesday proved to be the harshest day.
[00:05:07] December contract plummeted from $22,500 to $18,500, which was a staggering $4,000 drop,
[00:05:14] while January contracts slid from $14,900 to $13,500.
[00:05:19] The sell-off continued into Thursday morning with December hitting $17,600, but rebounded to $19,000.
[00:05:27] Friday brought a quieter session with lower trading volumes, though the market still trended downwards.
[00:05:33] And as of yesterday, the 3rd of December evening, December closed at $14,875, with January slightly recovering to $11,875.
[00:05:42] Okay, so quite a big drop.
[00:05:44] And looking at Panamax instead?
[00:05:46] So, the Panamaxes began last week with strong liquidity, as the December-January spread traded between $850 to $1,000.
[00:05:55] The Q1 contracts tested support at $9,000.
[00:05:58] And around midweek, the market faced a brutal sell-off, similar to the Cape sizes there.
[00:06:03] On Wednesday, December and January contracts dropped to $8,207,800, respectively, before finding some stability at these levels.
[00:06:13] Thursday saw a slight recovery, supported by the rebounding Cape rates, which helped the December-Panamax contracts climb back to $8,200.
[00:06:21] And by yesterday evening, December slipped further to $7,700, indicating a continued bearish sentiment.
[00:06:30] Okay, let's complete the picture with the Supermax.
[00:06:33] Okay, so pressure from the larger vessel segments definitely filtered down into the Supermax market, though activity remained comparatively subdued.
[00:06:41] On Wednesday, December contracts dipped to $10,400 and January followed suit at $9,100.
[00:06:49] The week ended with range-bound trading on Friday, as December settled at $10,000 and January at $8,800.
[00:06:56] But then as we headed into the new week, the Supermax remained steady, with December holding firm at $10,000, at January near $8,700.
[00:07:05] As of yesterday, December contracts remained stable at $10,000, reflecting the market somewhat insulated from the sharper decline seen in the larger vessel segments.
[00:07:17] And now let's maybe talk about the volumes overall.
[00:07:22] Yeah, that's an interesting thing to bring up from last week because it was quite high volumes.
[00:07:26] I think because the drive for fame market experienced a sharper correction than the physical index, with the Cape size December contract dropping nearly 30% and the Panamax December falling about 14%.
[00:07:37] This sharp movement led to high trading activities.
[00:07:40] So the daily averages were around 7,820 lots for Cape size, 6,170 for Panamax and a bit lower but 1,530 for the Supermaxes.
[00:07:51] As for the options trading, this was also fairly robust.
[00:07:55] Cape size options saw 3,385 lots traded last week, including the first C5 option trade for a 30KT December contract.
[00:08:04] In Panamax, interest shifted from P4TC to P5TC, with 2,160 lots traded on the latter compared to just 150 lots on the former.
[00:08:13] Open interest also surged as traders extended positions on longer dated contracts and increased short positions amid falling prices.
[00:08:21] As of November 28th, open interest reads 189,632 lots for Cape size, which is 10,145 more week on week and 175,359 lots for the Panamax, 6,800 more week on week and 73,493 lots for Supermaxes, which is down 400 week on week.
[00:08:47] Thank you very much for the update, Jess.
[00:08:50] And you can read more about this trade analysis and many more on several markets and commodities on the FIS Live app.
[00:08:57] You can have a look at the app on our website.
[00:09:01] And now let's talk about iron ore with Hao in Shanghai.
[00:09:05] How do you weigh the impact of the global tariffs increase on the steel market versus the stimuli on housing and infrastructure that is brought by China?
[00:09:13] I think obviously, U.S. started to impose several rounds of tariffs on steel originating from everywhere outside of U.S., including China, UK, Japan and Southeast Asia.
[00:09:26] And there could be more countries on the list.
[00:09:29] And we don't know like how much and how many ongoing.
[00:09:32] And personally, I think the long run impact will limit the general logistic of steel flow and make all important steel, make all steel making countries to turn export into domestic consumption, just like 2018.
[00:09:48] What happens there?
[00:09:50] And because the most effective way to transfer tariff cost is to shift tariff on some other countries.
[00:09:57] And however, there was signs that some countries are trying to import more steels before the government actually take the measure to increase tariffs.
[00:10:08] But we haven't seen any solid detail on the export numbers side, but just hearing from orders of steel mills in northern Asia.
[00:10:17] And learning from the trick wall in 2018 on this side, this is overall bearish in mid-run or long run.
[00:10:25] And I think the other counter against the bad news is the current market volatility was brought by the winter stock in China ahead of Christmas and Chinese New Year, as well as to Politburo in December.
[00:10:40] And the downstream data was fascinating in China, including eight tier one and tier two cities.
[00:10:46] So a mortgage rate actually increased after nine months of decrease.
[00:10:51] That indicating more house buyers were emerging.
[00:10:55] And statistically, the second-hand house rate in November created year high and seasonal high both ways.
[00:11:05] And what to mention, the second largest city in China, Shenzhen, actually the house buying number, the second-hand house buying number in that city actually created a 46-month high.
[00:11:18] So it is quite bullish on this side.
[00:11:22] And I think more to add, the issuance of October of China local debt actually up by 37% on the year.
[00:11:32] And so market read as this is a good news for flat steels because it's used on the manufacturing side and infrastructure side and including exporting steels.
[00:11:44] But it's a little bit nothing to do with the long steels because that's more linked to housing.
[00:11:50] And China is revamping more houses than building new houses this year.
[00:11:54] So that's actually have less connection to the long steels, including rebounds, but more HRC and CRCs.
[00:12:03] And looking now at Coking Call, the FOB market like stabilized at around $200, $205 for month and month.
[00:12:11] So do you see any opportunities?
[00:12:14] Is there going to be any opportunity for a directional move, for instance?
[00:12:17] As our weekly reports suggest a neutral recommendation on the FOB Coking Call for eight weeks.
[00:12:25] And the market stays static during the same time.
[00:12:28] And in China, the Coking Call is slight oversupply.
[00:12:32] In particular, consider the two news.
[00:12:35] One is Russia previously took off export tax.
[00:12:39] So that could mean more Coking Calls shipped to China or any other, and Europe.
[00:12:45] And in addition, Mongolia export of Coking Call maintained at seasonal high from October to November.
[00:12:53] And I think the traders estimate at least the first half of December it should maintain high as well.
[00:13:01] And from India's side, the demand was in pocket or small size, which was hard to bring the price up.
[00:13:10] And for Australian miners, they're waiting for weather change in January or post Chinese New Year opportunities.
[00:13:19] I think right now there is no obvious trend on the Australian FOB Coking Call, at least for the ongoing week.
[00:13:27] Okay, thanks, Al.
[00:13:28] And you have mentioned the reports.
[00:13:30] And then we would like to, again, suggest to all of our listeners that if you want to actually read the reports that you're writing, which are very, very interesting, they can log on the FIS Live app, where they can see not only house analysis, but also all the reports that are made by FIS.
[00:13:48] Haro, thank you very much.
[00:13:49] And I wish you a nice day.
[00:13:51] Thank you, Deborah.
[00:13:52] You too.
[00:13:52] Thank you.
[00:13:56] Now let's talk about fuel oil with Archie Smith, who's back in the booth again.
[00:14:01] What a pleasure, Archie.
[00:14:01] How are you doing?
[00:14:02] I'm very well.
[00:14:03] Thank you.
[00:14:04] How are you?
[00:14:04] Not too bad.
[00:14:05] Not too bad.
[00:14:05] Have you started with the Christmas shopping?
[00:14:07] No, Christmas shopping will get done whatever the weekend before Christmas is.
[00:14:11] Okay.
[00:14:11] It's at the 21st, 22nd.
[00:14:13] That's my usual John Lewis, my local John Lewis, get all of it in there.
[00:14:17] Anything that I can't get in John Lewis, I'll go to the big Master Spensers.
[00:14:21] Oh, good to know.
[00:14:22] Good to know.
[00:14:23] Okay.
[00:14:23] So let's have a look about what's happening on the crude market.
[00:14:27] So it seems that crude is actually struggling to break out of the 70 to 75 range at the moment.
[00:14:33] So maybe you can tell us about the factors that are keeping it like this.
[00:14:37] Yeah, sure.
[00:14:37] So as you said, it has been sort of 70 to 75, you know, kind of all of last month.
[00:14:44] I think if we look initially at the upside, because we did actually have a little push yesterday.
[00:14:50] So I'll start on the upside factors.
[00:14:52] There's been a bit of instability in the ceasefire that was agreed a few weeks ago.
[00:14:56] That particularly yesterday sort of caused prices to roof a little bit.
[00:15:01] A bit of shakiness in the ceasefire, we'll call it.
[00:15:04] I think another thing, looking at the specifically at that range that you gave us with 70 being the bottom,
[00:15:09] I think 70 is very much sort of a psychological support level.
[00:15:14] It's not been sub 70 for a while now.
[00:15:16] And that's that sort of seems to be the mark where if it gets to that level, we seem to bounce back.
[00:15:20] And another thing that's also been offering support to the market recently is the sort of market wide expectation that OPEC are going to continue their output cuts further.
[00:16:00] Okay.
[00:17:01] So people who hold those currencies are trying to trade oil, which is traded in dollars, have less buying power.
[00:17:07] So normally when dollars are stronger, we see crude come off a little bit.
[00:17:10] Let's turn our attention to the high sulfur fuel oil.
[00:17:13] The cracks have reached record highs at the back end of the month.
[00:17:18] So maybe you can tell us more about the reasons behind these new records.
[00:17:22] Yeah.
[00:17:22] So it was sort of late November trading.
[00:17:25] We saw the front end high sulfur barge crack really rally.
[00:17:29] This is a crack that's pretty much always in the negative, certainly since I've been in the market.
[00:17:34] At the highest point, it was sort of minus two.
[00:17:37] It had a minus two handle, so minus two, whatever it was, dollars.
[00:17:40] It was up, you know, probably like five or six bucks on the week.
[00:17:45] It has since interdeck softened a little bit, but it's still sort of particularly high when you look at average levels.
[00:17:52] I think fundamentally when it was all sort of happening in the market, it was all happening very quickly.
[00:17:57] We were trying to find some reasons.
[00:17:59] We was asking a lot of people and nobody really knew what was going on.
[00:18:01] But when you sort of took a step back, I think what a lot of it has to do with, again, links back to the OPEC supply delays.
[00:18:08] So a lot of the crude that comes out of those OPEC producing nations is sour crude or crude that contains higher sulfur content.
[00:18:18] And when you're refining this higher sulfur content crude, you've got more byproducts of the high sulfur fuel oil naturally.
[00:18:25] So with less of that in the market and indication that there is going to still be less of that in the market,
[00:18:31] the high sulfur crack has sort of rallied against that.
[00:18:33] And then I think that sort of initiated the snowball.
[00:18:37] In my opinion, I think it was a little bit overcooked.
[00:18:40] But I think what that sort of happened is that that started the snowball effect.
[00:18:44] And then there was a lot of sort of short covering where everyone's having a bit of a panic up.
[00:18:47] Oh my God, the cracks rallying massively here and a lot of short covering which snowballed it further.
[00:18:51] And then we just saw it hit like ridiculously high levels, which inherently closed up the high five differential,
[00:18:58] which is the price difference between the high sulfur fuel oil and the low sulfur fuel oil.
[00:19:02] So yeah, we've seen it particularly in the Rotterdam specs.
[00:19:06] We've seen the Cal 25 Rotterdam High Five is what has been sort of as low as 60 bucks.
[00:19:14] So yeah, effectively, if vessels are fitted with scrubbers,
[00:19:19] they're sort of getting less bang for their buck on a spot basis.
[00:19:23] Thank you very much, Archie, for joining us.
[00:19:25] No problem.