You might be mistaken for thinking that I am referring to the typically British weather that we have had recently, whereby what could have been a gloriously sunny summer has been interrupted by biblical rains and high winds.

 

Alas not, as awkwardly British as it would be to talk about the weather, there are more interesting things at work in the world of freight and commodities. Nowhere is that more true than in the iron ore market.

After the major grades of iron ore futures contracts hit the dizzying heights of over $220 prices are have now tumbled over $60 lower than their peak in May, and around $50 lower than 2 weeks ago.

It has been a long time coming, with predictions of over-speculation and unsustainable prices haunting the iron ore market for month after month. We have all read the news clippings noting new restrictions on steel production, emissions concerns, and price manipulation statements, but like water off a duck’s back the market endured.

Yet it seems that all of the statements about steel production curbs, mill shutdowns to reduce emissions, and a slowing Chinese economy after it had come roaring back to life white hot post pandemic has dumped ice cold sheet rain onto sentiment.

But it hasn’t only been the iron ore market that has been caught in a monsoon without a brolly in sight; it seems that the contagion has also spread to the oil market. After a carefully choreographed recovery, one might have been mistaken that we were watching an OPEC production of Cinderella, with the shoe of production perfectly fitting the needs of demand, living happily ever after in the bliss of $100 a barrel.

The truth of the matter is that this is more a story about the ugly sisters – those OPEC nations who have been pushing for higher production quotas and finally got their way recently. If you add virus concerns then it will come as no surprise that Brent prices dropped below $70. The new OPEC+ deal have the UAE a surprise 332,000 b/d boost to its production level, Saudi Arabia and Russia will also be granted 500,000 b/d baseline increases, while Iraq and Kuwait will get 150,000 b/d rises, all accounting to some 2 million bbl increase by the end of the year.

If you needed more evidence of the weaknesses in the oil market, all you need to do is take a look at the crude tanker market that has been languishing in the doldrums for something positive to happen. With VLCC rates static around the WS30 level for months, they have been channelling a rain-soaked Leyton Orient vs Crawley Town rather than Real Madrid vs Bayern Munich.

But as in normal life, there are always exceptions to the rule, that smug know-it-all who checked the weather forecast and standing there in their wellies and anorak like a human barometer. The dry freight market has been able to weather the storm well, with the Capes, Panamax and Supras all at least tripling rates since the start of 2021. So far, the market has been pretty water tight, but can it keep out the factors that are driving down other markets? Tight ship supply has given the market stronger fundamentals than other markets, or is this just a setup for a classic shipping overbuilding programme?

What is sure is that a deluge has been dumped onto the iron ore and oil markets with more storm clouds on the horizon. As these potentially soggy factors build up it could eventually get to a stage where even the largest amount of rice isn’t going to dry out this commodity phone.

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Source: Freight Investor Services

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