Freight Market Analysis: Uranium, Spreads, Dry Freight and Battery Metals
Hello and welcome back to Freight Up, the number 1 commodities and freight markets podcast from FIS.
I'm your host, Fernanda and in this episode of Freight Up, I'm joined by Davide, the newest member of the "Freight Up" team.
We're going to explore the intricate world of freight and commodities.
From the dry freight market to battery metals, we cover a wide range of topics.
We'll discuss China's economy, iron ore demand, mining developments, and uranium, shedding light on the market movements in various freight indexes.
Davide offers valuable insights on the battery metals market, including recent price movements, policy impacts, and future growth prospects.
We also have our senior technical analyst Ed Hutton on with us sharing his expertise on the dry freight market, delving into market volatility, spreads, and potential bullish signals.
It's a content-packed episode that you don't want to miss on "Freight Up".
Timestamps
00:00 China's economy experiences deflation, PBOC takes action.
03:54 Indexes show gains and some decreases.
08:36 Physical market importance grows, derivatives on debt launch.
09:56 European Commission forecasts significant rise in demand.
14:21 Historical spreads and futures indicate bullish outlook.
17:59 Shipping market spreads overexposed, potential imbalance.
19:43 Market needs rebalance, spreads signal overexposure.
00:00:00
With freight rates twice as high as they were this time last year. Our
00:00:04
technical analyst, Ed Hutton, has been looking into some interesting
00:00:07
spreads and other things he's noticed in the dry freight market.
00:00:11
Also, battery metals are the commodity of the future.
00:00:15
So we're here to discuss why the 80% drop since
00:00:18
2022 shouldn't deter you. All this and more on freight
00:00:22
up. Freight up, you.
00:00:25
Hello and welcome to freight up. My name is Fernanda and I'll be your host
00:00:29
as we navigate the seas of freight and commodities. Today's
00:00:32
episode is quite and action packed. One we have Ed
00:00:36
Hutton giving us our technical report and a voice
00:00:40
you haven't heard before. Davide. Davide is
00:00:44
joining me in the studio today. How are you doing, Davide? I'm fine,
00:00:47
Fernanda. How are you doing? Really well. Are you
00:00:51
having a pretty good year of the dragon? Oh, yes, it's going quite
00:00:55
well so far. That's wonderful to hear. And in spite of the
00:00:59
huge holiday, we do have quite a bit of macro news for
00:01:02
our audience, don't we? David Fernando? Speaking of China, the
00:01:06
economy is actually experiencing the longest deflationary
00:01:09
period since 2008. And of course, the authorities are
00:01:13
concerned about the negative effects of the falling
00:01:16
prices. The real estate sector seems to be the main culprit of
00:01:20
this deflationary period. The PBOC, which is the people
00:01:24
banks of China, has reduced its benchmark five
00:01:27
year loan prime rate by 25 basis points.
00:01:31
And it's trying to provide a little bit of support to a sector
00:01:35
which is absolutely paramount to the country's economy. The
00:01:39
consumer confidence in China is actually quite low. The last reading is
00:01:42
actually standing at 86 7.60 points
00:01:46
in December, which is far from the all time high of
00:01:50
127 points, which was recorded in
00:01:53
February 2021. And in terms of China, one of
00:01:57
the big commodities that always comes up in the conversation
00:02:01
is iron ore. So how's that looking, David? Well,
00:02:04
actually, iron ore has hit the three months low after the
00:02:08
holiday and for the year of the dragon, of course, like lots of
00:02:12
people were on holidays, the experts are actually expressing
00:02:15
concerns regarding the level of demand that China could have
00:02:19
in the foreseeable future. Obviously, China is
00:02:23
consuming something around like, 90% of the
00:02:27
world iron ore supply, so the health of the
00:02:30
chinese economy will have a major impact on the future prices.
00:02:34
That, and specifically the housing market, is
00:02:38
something that plays a huge role in that. But mining, on
00:02:42
the other hand, is also something that we need to keep
00:02:46
track of. So do you have any developments there?
00:02:49
Yeah. So, recently, Rio Tinto profits have dropped
00:02:53
12% on the back of the weaker commodity prices overall.
00:02:56
But the company has also unveiled a 20 billion
00:03:00
us dollar investment project for iron ore mining
00:03:04
in the Simondu mountains in southeastern
00:03:07
guinea. And in a rarer occurrence
00:03:11
on this podcast, David, we're going to be talking about
00:03:14
uranium. Yeah, that's true. So after the lows, we have
00:03:18
the highs. So the uranium has recently hit the
00:03:22
16 years high and has been backed by the
00:03:25
investment banking heavyweights Goldman Sachs and Maguire.
00:03:30
As countries are increasingly looking at the nuclear energy
00:03:33
as a source that should help them in reducing the carbon
00:03:37
emission, we will see if the price will continue to
00:03:40
rise or not. And as always, you have frayed up to keep you up
00:03:44
to date on these and all macro movements.
00:03:48
So on the theme of macro, Davide, what have the general market
00:03:52
movements look like this week? We're looking at the main
00:03:56
indexes here, and of course, like the data Tuesday to Tuesday. So starting
00:04:00
on Tuesday the 13th and then compared to Tuesday the
00:04:03
20th, so on the cap size five tc, we
00:04:07
have $855 gain, which is
00:04:10
equal to 4.3%. On the Panamax five tc we
00:04:14
have interesting increase, which was from
00:04:17
$13 a day to
00:04:20
15 a day, which is equal to a
00:04:23
21.1% increase. On the supermax ten
00:04:26
tc we got from eleven and $515 a
00:04:30
day to 12 a day,
00:04:33
0.6%. On the handy size, we have a decrease
00:04:37
of 1.72%, equal to $179.
00:04:39
And then we spoke about iron ore. So
00:04:43
the decrease we have seen has been of 725,
00:04:47
which is equal to 2.9%. It went down
00:04:50
from $129 to 121 and
00:04:53
$0.95. On the sync, 380, we went
00:04:57
from 434 and $23 to 428
00:05:00
and 70, which is a decrease of
00:05:03
5.6%. Sync 0.5 from
00:05:06
614,
00:05:10
which is a very, very small increase of 0.7%. And on
00:05:14
the US HRC, we have gone from
00:05:17
$933 on the 13 February to
00:05:21
the $925 on the 20
00:05:24
February, which is a decrease of
00:05:27
$8. So,
00:05:30
David, let's next take a look at a key future
00:05:34
commodity market, that being battery metals.
00:05:37
We've recently published a short article on this market and recent
00:05:41
price movements and prospects for the future. If you'd like to view
00:05:45
that article, you can do so on fis live now, picking
00:05:49
up on some of the key points from that article. What have been the main
00:05:52
drivers behind this move and what do we expect for the near
00:05:56
future? Fernanda, you've mentioned that there's been drop
00:05:59
in prices. So yes, we had lithium prices, they've dropped
00:06:03
over 80%. And on the other side, Nikel and cobalt
00:06:07
have gone down also like by 40%. So we have seen a
00:06:10
general and overall dip in the market. That's the first one.
00:06:14
Also the big policy announcements, all the
00:06:17
big drivers that in the world, they had the time to filter through the
00:06:21
economy and through the markets now. So in the US we had the American
00:06:25
Inflation Reduction act. And also in China we had
00:06:29
a lot of steady investments in the raw
00:06:32
material processing capacity for battery metals. Speaking also
00:06:36
like of policy actions, governments have in general
00:06:40
softened their approach on the environmental policy
00:06:43
as a whole. And they've created a sort of like
00:06:47
lackluster environment of incentives for
00:06:50
consumers if they want to purchase electric vehicles. There's also been
00:06:54
like a watering down of the previously
00:06:58
strong actions on the environment. If I can
00:07:02
make one example, there's the renew interest in
00:07:05
nuclear energy. Hence the mention to uranium, which
00:07:09
instead of, rather than pushing relentlessly on renewables, we're
00:07:13
finding this element here. And also, instead of pushing also on
00:07:17
the undergrid level, battery storage in the physical market, we've
00:07:20
also seen an oversupply that is in comparison to the
00:07:24
current demand. All of these issues bundled together, I would say
00:07:28
they've contributed to depressed the prices.
00:07:32
My opinion it will be to just look at that of more than a lull
00:07:36
rather than the endpoint for the battery metals
00:07:39
market. I'd say it's definitely a compelling case to do so.
00:07:42
David, also looking at volume
00:07:46
growth in the derivative market, it's been impressive since
00:07:50
various battery metal contracts have been launched. How have
00:07:53
these volumes performed so far this year? What do we expect
00:07:57
going forward as well? I think that impressive is the right word
00:08:01
for volume. Just to mention a few key figures on the CME.
00:08:05
Cobalt. The 2022 market volume was
00:08:08
15. And the market volume for this
00:08:11
year is equal to 25, which is
00:08:15
an increase of like 59%. But I would say like this is
00:08:19
a drop in the ocean in comparison to what we're seeing in the lithium market.
00:08:23
We're going from 426 to
00:08:26
17. So we're talking about
00:08:29
a percentage increase of 3974%,
00:08:33
which is something that you don't really see every day. So there
00:08:37
is the growing importance of the physical markets
00:08:41
that has also enabled the launch of the derivatives on debt. So we
00:08:44
have now contracts that are being offered on the CME, on the
00:08:48
SGX and the LME exchanges. And also like
00:08:51
there's contracts for now, apologize if I'm mispronouncing
00:08:55
them cobalt hydroxide, lithium hydroxide, lithium carbonate,
00:08:59
and molybdenum oxide. So on the
00:09:03
derivative battery volumes, they have, I would say like a pretty
00:09:06
healthy volume increase since their respective launches. FIS as
00:09:10
a company has been like one of the key drivers in the launch of these
00:09:14
contracts, and is now commanding a very strong
00:09:17
market share. So as you can see from the volume that we have
00:09:21
seen in the market over the last few years, we have seen almost like a
00:09:25
4000% increase in the volumes for the
00:09:29
CME lithium contracts alone. So it's actually quite promising.
00:09:32
And we will think that the future will go. It will be
00:09:36
better and better. It will go strength to strength.
00:09:40
So it looks like there's a really exciting future
00:09:44
growth prospect for the physical demand of battery metals.
00:09:48
Some 3 million tons for lithium carbonate equivalent
00:09:52
by 2040. That must make you excited about the
00:09:55
future. Yeah, I think that the prospects are really exciting.
00:09:59
So, just to give you some estimates, these are
00:10:02
coming from the European Commission. Their forecast Hao aided like the
00:10:06
demand for the rare earth metals should increase sixfold
00:10:10
by 2037 fold 2050.
00:10:13
This is just like for the rare earth metals, but for
00:10:17
lithium is supposed to increase fis twelve fold
00:10:21
by 2030 and 21 fold by 2050.
00:10:24
So it's a very big rise. Two of the top
00:10:28
energy transition investors have also recently unveiled in
00:10:32
Davos in Switzerland, 500 million euro fund,
00:10:35
which will be focusing just on battery metals, which
00:10:39
will include, of course, like lithium, nickel, a cobalt. It
00:10:43
should also reduce Europe's reliance
00:10:46
on supply that is coming from abroad. Speaking
00:10:50
of Europe, also, we have several countries who have already
00:10:54
announced or already opened new gigafactories.
00:10:58
We have Germany, which is the first one. It's the country
00:11:01
which has the lion's share. But the overall number of factories should
00:11:05
increase drastically by 2050. In the US
00:11:09
instead. The Inflation Reduction act, together with other incentives, is
00:11:12
also like contributing, and which should end up like bringing
00:11:16
$135 in investments
00:11:20
in the american electric vehicle, and for the
00:11:24
overall critical mineral sourcing and processing for zero
00:11:27
emission vehicle mandates. We have been seeing, like the UK,
00:11:31
that is going to ban the sale of new combustion
00:11:35
engine by 2030. And in
00:11:38
2035, this will also happen in Canada and EU.
00:11:41
This will of course contribute to drive up the demand for these
00:11:45
key materials. Just to give you the last estimate, again, also
00:11:49
coming from the EU, they're predicting a global
00:11:53
demand increase for batteries of like 14 times by
00:11:56
2030, if we compare it to levels of 2019.
00:12:00
So lithium alone is predicted to
00:12:04
increase like by a good solid 30%.
00:12:08
Year on year. So there's clearly a lot of
00:12:11
ambitions across the pond, both in Europe and the Americas, and
00:12:15
then they should lead to an increase in the production of batteries as well as
00:12:19
the demand for the finished products in batteries and the
00:12:22
electrical vehicles. It's a really exciting market. We're really
00:12:26
looking forward, and we're really hoping that this will also contribute to a
00:12:30
cleaner environment. Phenomenal. And as always,
00:12:34
if you have any questions on this
00:12:37
article or anything in the battery metals world, Anna
00:12:41
Chadwick and Lukewind at FIS are always there to answer your
00:12:44
questions. Davide, thank you so much for joining us.
00:12:48
Same time next week? Yeah, why not? It's been a
00:12:52
lot of fun.
00:12:56
And next to our podcast, we have Ed Upton, who's our senior
00:13:00
technical analyst, and he's going to talk about our latest
00:13:03
analysis, which, if you're interested and if you want to read it, is available
00:13:07
on the FIS Live app. Ed, thank you very
00:13:11
much for joining this week. So let's
00:13:15
have first a look at our dry freight market. So what
00:13:18
we have seen is that the market has been less volatile this
00:13:22
week across the board. We've seen that it's actually
00:13:26
been quite flat in comparison to the recent months
00:13:29
in terms of indexes. Just to give you a little bit
00:13:33
of context and some key figures, we have seen that, like the
00:13:37
Cape size five TC has gone down
00:13:40
2.7% in comparison to week on week.
00:13:43
The Panamax five TC Hao gone up like 10%
00:13:46
$1 402, the supermax ten
00:13:50
TC is going up 7.8% and the handy
00:13:54
size is going up 5.2%.
00:13:58
Now that with our indexes out of the way, I like
00:14:02
to ask you a couple of questions about the article. You
00:14:05
have mentioned that there hao been a contrast between, on one end, a bullish
00:14:09
seasonality, while the Panamax index versus the rolling front
00:14:13
month ratio has entered instead like a support area.
00:14:16
So, can you tell us what happened last time that we saw a similar situation?
00:14:21
It's just an observation that we made when looking at the historical
00:14:24
spreads, or should we say the ratio. We're entering a period in
00:14:28
the Panamax and the supermax where the seasonality generally starts
00:14:32
turning bullish at this time of year based on three year averages, three
00:14:36
year highs and three years lows. What I was observing was the fact
00:14:39
that the ratio at the time of the article was getting very close to
00:14:43
going sub zero points leverage. What makes this interesting is
00:14:47
because when we were looking at the carry of the futures on the rolling
00:14:51
front month over the indexes, it's like $3,
00:14:54
which would suggest that the futures look a little bit overexposed,
00:14:58
which from a technical perspective, although may be the case,
00:15:02
what the ratio has actually done on previous occasions
00:15:06
that we've been got close to this sub 70 level, or sub
00:15:09
70 is we've actually seen, it's the index that has been
00:15:13
the mover rather than the futures correcting. So it actually
00:15:17
can be a bullish signal for the physical. So we just wanted to highlight the
00:15:20
fact that although when we looked at the future and we're like, okay,
00:15:24
they look really overexposed and they aren't you of this pullback, be a little
00:15:28
bit cautious because we're not necessarily looking at a pullback that will be
00:15:31
three, $4 because we had an expectancy that the index would start
00:15:35
moving. And to be fair, since we've actually sent those
00:15:39
reports out, as you can see, we have seen these
00:15:42
7810 percent moves in the indexes already. So they are already starting to
00:15:46
shift to the upside, where the futures have started to consolidate to maybe
00:15:50
correct a tiny bit this morning, but they've been fairly stable for the
00:15:54
last ten days, partly because of the
00:15:57
chinese new year, but I suspect partly because you can't buy the
00:16:01
futures because the carry is too big. But the sentiment is bullish
00:16:04
enough, the seasonality is bullish enough that it's the index and the physical that's starting
00:16:08
to shift. So basically you're telling that the dragon is still
00:16:12
casting a shadow on the markets as well. And also, I like to follow
00:16:15
up with another question that I had by reading your article. I mean,
00:16:20
you have said that on average, like capes tend to move faster than
00:16:23
panamaxes and also tend to correct faster. So in these
00:16:27
regards, what can we expect going forward? I mean, the
00:16:31
capes is a very interesting sector at the moment, because if you look at the
00:16:34
indexes, the valuation at the moment is like 20, just under
00:16:38
the three year average values for this time of year. At 10, we're double the
00:16:42
price that we normally are. And this is throwing a little few things out of
00:16:45
line because there's obviously a very bullish sentiment across the market because as a
00:16:49
general rule that we would look, the markets are all fairly well
00:16:52
supported. The indexes are now starting to shift with the futures, but
00:16:56
the futures are holding in these patterns that suggest that
00:17:00
there's an overall bullish sentiment across market. Which makes sense,
00:17:03
obviously. I mean, I know I'm a technical analysis, but if you look at
00:17:07
what's going on in the Red Sea, the Panama Canal, then obviously
00:17:11
come miles is a big factor here. So there's an expectancy of longer term. The
00:17:14
market is going to push up this year, but this has blown out
00:17:18
a lot of the spreads on the front. So where we would normally look at
00:17:22
the q two, q three spread, it's trading in the case, it's
00:17:25
trading near flat. This spread is now
00:17:28
$4 above average values. Whilst at the
00:17:32
same time, you've got the same pattern with the q two versus three four spread.
00:17:36
Now, if this market does enter a corrective
00:17:39
phase, even if the longer term trend is bullish
00:17:43
and we enter a corrective phase, they can be quite aggressive. The moves in
00:17:46
capes fis, the most volatile of the sectors, the first thing that's going to come
00:17:50
under pressure, in my opinion, will be these spreads. Because of their overexposure. They're
00:17:54
above three year average values, three year average highs, to be honest,
00:17:58
Smith, you. They're above five year seven year. So the spreads are looking
00:18:01
overexposed. That involves the q two, but
00:18:05
there's a bit of an elephant in the room in the capes, because if you
00:18:08
look at the q three versus the q four spread, that's actually
00:18:11
due to turn bullish and is below seasonality values.
00:18:15
Although everything is up and above values, it looks like it's the q two and
00:18:18
the q four that have made this more general shift
00:18:22
higher or more aggressive shift higher than the q three, which,
00:18:26
as anyone that works in shipping will know, q three is generally the most bullish
00:18:29
quarter of the year. So there's a bit of an anomaly in the market.
00:18:33
And I look at this and just think, okay, if there is a
00:18:36
correction in the market, the Q two, and to be fair, the Q four probably
00:18:40
look a little bit overexposed. And it does make me wonder if people
00:18:44
should maybe be selling the wings there and buying the q three and selling the
00:18:46
q two and the q four against it, and just looking for, as a short
00:18:50
term play, maybe looking for the markets to rebalance and recorrect.
00:18:54
And just these spreads kind of narrow in the q two versus q three. And
00:18:58
possibly we'll see the q three, Q four spread going bid.
00:19:01
So you'll get the double advantage. If you traded the
00:19:05
butterfly there, you'd be basically selling Q two, buying twice
00:19:08
the Q three, and selling the Q four. I just think that's an
00:19:12
interesting factor to see in the market. We've seen in the Panamax
00:19:16
supermax breads, we've seen them blow out a little bit. They've kind of rebalanced more.
00:19:19
The James haven't so much. So I just think
00:19:23
that there's some interesting stuff to watch in that space, because the
00:19:27
Q three on its own is suggesting, and I
00:19:30
look at the Q three rather than the Q two right now, because the Q
00:19:33
two rolls in a few weeks. If you look at the Q three
00:19:36
spread, just purely on the psychological wave analysis that we use for
00:19:40
the Elliott wave, I think there is a larger ball cycle still in play. So
00:19:44
I don't necessarily think that downside moves are going to
00:19:48
signal the end of this ball run that we've been seeing or this ball holding
00:19:51
pattern we've been seeing. I just feel that there needs to be a rebalance in
00:19:54
the market, and I think these spreads are where the market looks more overexposed
00:19:58
and probably a safer place to be in, because obviously,
00:20:02
if you don't get any kind of mean reversion that we
00:20:05
perhaps need, you could be a little bit overexposed by being
00:20:09
vanilla short rather than having the spread on.
00:20:13
To ask you the final question in conclusion, is there something that
00:20:17
our listeners should look at? I don't know, for instance, like the
00:20:20
spreads? What do you think on that? Just give us one, your view, one
00:20:24
sentence. Well, one sentence. I mean, I just think you need to be looking
00:20:28
at anything that involves either selling the Q two or buying the Q three. Right
00:20:32
now, within the spread, I do think they all need to correct a little bit.
00:20:35
But if you're going to be long a spread, then I'd be long Q three,
00:20:38
Q four. If I was short, I'd be short Q two, Q three. Well, Ed,
00:20:41
that's been slightly more than one sentence, but I think that
00:20:45
it's good enough. Thank you very much, ladies and gentlemen. This was Ed
00:20:49
Hutton, our senior technical analyst. Thank you very much,
00:20:52
Deborah. Well, that's it for this time. Thank you so much for
00:20:56
joining us. And if you haven't already, make sure to hit that
00:21:00
subscribe button wherever you get your podcasts from
00:21:04
until next time. So, because you
00:21:07
insist, we will see you.