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We have been going through a very interesting year in terms of freight markets, as many of you reading this would most probably agree.
On one hand, starting from late February we have a de-facto change in our understanding of Eastern European politics which is very likely to shape the next decade not only with regards to how companies and people make business but also with whom they want to make business. This alone is a tectonic shift but market reactions to this fact have been mixed. I will try to summarize my humble insight into the issue late on in this article, but continuing from where we left, on the “other” hand we have the global monetary situation also overlapping with the above. Almost simultaneously with a slowdown in world economy United States Federal Reserve started interest hikes. This was history repeating itself as the pre-covid era was about to show us what would happen if global cost of money increased.
We are now facing facing global recession fears (which does not make any sense “technically” as the global economy should not contract in two consecutive quarters) and a slowing trade amid tensions that have a good potential of spilling over (Black Sea, South China Sea, what next?).
On the financial front, there might be more rate hikes to come and definitely global inflation justifies this mostly, despite some signs of easing. In nay case the “cure” will take its toll on trade and shipping. As at the time this article was being written, Baltic Dry Index was at one-year-lows. But outlook for dry bulk carriers has so far been ambiguous… not completely bleak but not reassuring either.
I will give you some food for thought as nothing in shipping is static and any theory can be contradicted by another one. One factor influencing the rates upward today, could potentially cause exactly the opposite next day.
The Green Factor
At one side we have the EEXI, 2023, emission etc. as well as the weak orderbook in particular. For bulk carriers, the theory suggests that slowing of tonnage (which is a direct result of the EEXI classification and subsequent engine power limitation) will reduce the tonne x mile supply causing a surge in rates that would be felt more intensively after 2023. The historically weak orderbook of vessels (especially handy and supramax) will not help and eventually rates will enter a bullish period.
That more or less seems logical… or does it?
According to contradicting studies, the supply of tonnage might only be disrupted by about 1 percent on average. If that should be the case, despite the lack of orderbook, midsize tonnage supply would remain undisrupted and a decline in rates would be inevitable. This was analysed by SSY and Professor Roar Adland made several nice posts on this issue on the social media.
Depending on how it will unfold, this “tricky” factor will influence rate sone way or the other.
The “Greenback” Factor
On the other hand, we have the macroeconomic environment. As mentioned, post-Covid-19 inflation is perceived as a threat across the globe and central banks are putting great effort to restrain the general increase in prices. As at mid-August, while this piece was being written, United States July inflation came at “zero”. That was received positively in the global markets as other major currencies gained against the USD, including the emerging markets. If August and even September inflation readings should post similar results, this would lead to a market sentiment whereby markets assume or expect that Fed might reduce the pace of rate increases. My opinion is that this potentially could have an effect similar to a quantitative easing, only with temporary impact of course.
I, personally, am a bit more worried for European economy. Although European Central Bank does have to follow Fed’s footsteps and indeed is slowly coming there, the Russian-Ukrainian war and its repercussions are closer to Europe than the United States. Europe now has to sanction or perhaps completely ban the trade of some commodities it needs from Russia. Ukraine probably will not be able to supply the very same commodities for a long time, excluding perhaps grains. Turkish steel exports to Europe are still regulated via quotas. This is a very effective inhibitor for front hauls from Black Sea to Mediterranean and Continent, especially for handysize and below.
Here is another cause for concern: Fed’s rate hikes and its impact on Europe. USD interest rate hikes caused two things: firstly euro depreciated agains the USD, making any imports of European Union more costly. This was also coupled with already mounting global inflation. You can imagine the double whammy. Secondly, the increase in euro rates caused investments to become more costly and consumers more worried. All of these spell demand contraction and we can easily see that on Purchasing Managers’ Index (PMI) readings and manufacturing demand.
Anyway, for the time being general market expectations are:
• Some recession (United States is already in it…)
• More rate hikes
• Monetary tightening until end 2023.
• Thereafter some easing.
The timing is strictly based on inflation and the “patient’s response to the cure”, essentially meaning that if hikes work, we can see faster but still gradual shifts.
The real and longer war
Finally the trade wars -or “evolving” trade wars shall we say- are set to intensify. Maybe Russia and Ukraine fight will end (God knows when) but the West will not easily accept Russia, its commercial capacity and resources for a long time, even if that means shortage of energy et cetera. China will be constantly tested. All of these mean loss of some old tonne x miles and arrival of new ones. We can see Russia becoming cheaper raw material, energy and semi-product sources for India and China. Meanwhile obviously, ton x miles of energy and energy related commodities ex-Russia will decline.
Against all odds, the last word: we should note that the last quarter of the year is traditionally positive. Let us see how the other factors will influence the markets.
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