Ship Shape – FIS Commodity

It is everywhere. Chatter about the coronavirus has taken over the pages of every single news website, creating a homogeneity of panic. It’s also turned that friend of yours (invariably called Dave), who bangs on about conspiracy theories, into talking like the world’s leading medical expert. We may have seen a bit of bounce in markets since the first announcement of the virus, but the reality is that we aren’t out of the woods yet.

There’s plenty of rubbish floating about on the true impact and cause of the outbreak, but I guess some home truths will give us more understanding on its impact on the world economy and commodities. To think that the outbreak of the virus has led the general public to push up the 2011 film Contagion into the top 10 on iTunes gives us a taste of the situation at hand. Perhaps we at FIS could build more business by getting that 1942 classic Hedging trending again in the charts?

Lunacy. Well, the Chinese Lunar New Year brought with it a quieter market than expected because of the virus. The Chinese exchanges have extended their closures and economic activity is much subdued, demonstrated by crude oil demand falling about 2 million barrels a day, or 20% of total consumption. Air and rail passenger traffic in China has dropped dramatically, down nearly 45% so far in 2020.

So, what is the cost of all this disruption? The Economist surmises that growth in China for the first quarter of this year could fall to as low at 2%, well below pre-virus estimates of 6%. An important factor to consider for people comparing this to the SARS outbreak in 2003 is that China now represents a much larger part of the world economy. In 2003, China was only 4% of global GDP, something which has increased dramatically to 16% today. Hundreds of global companies, from Starbucks to Ikea, are still unable to conduct normal operations, as their manufacturing and operations are shut down. While the virus is seemingly less deadly than SARS, it may have more of a lasting effect on the world economy than previous epidemics.

Those of you who have watched the HBO TV mini-series Chernobyl will be well aware how authoritarian regimes can sometimes be unwilling to accept catastrophic failures of judgment until things are too late. If covert reports coming out of China are to be believed, then we could get a double dip on this realisation that the situation is much worse than officially admitted.

One thing is for sure though, if you have arkoudaphobia it’s time to run away. The bears are here, and they are here to stay. The back (and some front) pages of the finance press are awash with minus figures from all world stock markets, to commodities and other macro indicators.

In other news, IMO 2020 has now had a month to cause havoc in freight and oil markets, as the lower sulphur grade has forced consumers of fuel to pay ludicrously high prices. This has in part been due to the higher costs of refining the new grade, but also to the lack of availability of bunker barges, creating around a $100 premium for delivery. A double whammy for shipowners, none of their customers is moving anything but if they do, it will cost you twice as much to move it!

As a result, freight prices have been struggling along like a hermit crab with an inordinately large mortgage. The high fuel prices have cut daily earnings to even something even an austerity Tory government would want to do something about. The sentiment that has infected these fuel and freight markets weighs on others like a pall of depression waiting to be lifted.

There is hope on the horizon though. Scientists are reported to be making swift progress towards creation of a vaccine and OPEC have announced the potential for more cuts. Q2 could be the time when China comes back motoring, demand for commodities are up, with IMO 2020 problems ironed out. Forget the year of the rat, we could find ourselves in the year of the bull.
Source: Freight Investor Services (FIS)