With the Chinese New Year celebrations a few days away, dry bulk ship owners are bracing for what they hope to be the first and last freight market low-point this year. Traditionally this time of year, with Chinese importers out of the market, the dry bulk market is witnessing its year lows and 2017 should be no exception to this rule. However, regarding the future prospects for a rebound in the dry bulk market, much will be determined in the weeks which should follow this festive period, with mid-February expected to be a crucial period for the market.
In its latest weekly report, shipbroker Allied Shipbroking noted that “the year has started on a much firmer note than usual, with most of the basic commodities showing to be gaining in strength and their respective prices climbing quickly. Iron ore has outshined most in this particular cases, having managed another 6.1 percent increase since the start of the New Year, on top of the already staggering surge of 80 percent that it noted from its low point in December of 2015”.
According to Allied’s George Lazaridis Head of Market Research & Asset Valuations , “this has been heavily reflected in the Capesize market with, freight rates there having managed to hold at fairly firm levels since September, supported by the higher demand in Chinese imports that has been witnessed. This increased demand has mainly been driven by the fact that the Chinese government has put its focus on shifting production towards premium steel products which in turn require higher quantities of imported iron ore from Australia and Brazil.
Lazaridis noted that “in the midst of this we have also seen a sharp rise in speculation amongst traders, with many willing to bet on higher prices then are currently supported by market fundamentals. AS such the price gains keep on climbing, while at the same time driving the increased consumption that has been noted in China and helping support the market forward. The grey clouds that have amassed however in this particular case is that these sharp increases in the price of most basic commodities has in turn helped feed the return of inflation in the developed world. For the moment this inflation is much welcomed, as it helps ease the fears of a possibility of moving into deflationary territory when inflation rates are at such low levels. On the down side if inflation rates start to run too hot, possibly moving at such levels which would drown out global growth and cause another slump in consumption. The main culprit of this is more likely going to be crude oil, which played a major part in bringing down inflation in the period 2015- 2016 as its price dropped to bellow US$ 30 per barrel, but given its rise and overall trend, could see prices more than double from that low point in 2016, something that could surely have a strong influence in driving inflation figures ever higher”.
Allied’s analyst went on to note that “on the more positive note, inflation is always dependent on the amount of slack prevalent in an economy, with too much spare capacity usually preventing too high an increase in inflation (in theory). This is well portrayed in the case of the U.S. where inflation has been at higher levels then most of the rest of the developed world something that is surely supported by its comparably low unemployment rate (4.7%) and relatively high annual increase in average wages (2.9%). The only problem here is that the world seems to have become more dependent over the past months in the U.S. economy to drive global growth. With a higher risk of the U.S. market overheating and faltering on its growth projections, this could have domino effects on global consumption and trade”.
Still, “as things stand now things are looking fairly positive and we could see the markets show a considerable improvement compared to 2016. Demand is still holding firm and with this period expected to be a low point in the market due to the typical subdued activity which is witnessed just before the Chinese New Year, argument could be made that things should fire up quickly from mid-February onwards. It will take more than increased demand for iron ore however to boost the whole of the dry bulk market”, Lazaridis concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide - 20/1/17