Did Someone Mention Increasing Demand?

It is the panacea for all markets, the biggest factor that could help us recover some sense of normality, the only thing that will bring a smile to suppliers across the world. It is, of course, increasing demand.

 

The virus has caused huge disruption and left markets unable to react quickly enough to counteract the dramatic drop in demand. Now, with the opening up of economies after lockdown, our thoughts – and those of traders, investors, economists, bankers etc – are increasingly turning to the question of increasing demand.

 

With so many commodities on its bill of fayre, the behemoth that is China is the overwhelmingly important factor. Be it crude oil imports, iron ore for steel production, or soya beans, when China orders, it buys in a big way. That is why its strict shutdown at the beginning of the pandemic was such a shock to the global trade system.

 

Now that the virus appears to have come down to controllable levels, the Chinese economy is starting to fire up again. Its oil demand has risen to record levels at 11.34 million bpd in May. This has caused oil tanker queues of over 40 ships outside one of its major oil refining hubs, which it is estimated it could take until August to clear.

 

The tussle between returning demand and virus disruption continues, but the one major positive for the demand argument is that it is not a question of if, but when. For the virus too, as previous outbreaks have highlighted, it is a not a matter of if it becomes manageable, eventually things will return to normal or something like it.

 

China’s demand for Australian and Brazilian iron ore imports from have helped Cape rates reach new recent highs. Cape tonnage remains incredibly tight for Brazil and this has spiked the C3 rate with $21.75 printed yesterday – about another $3 up on where we were last week. Iron ore shipments from Australia and Brazil rose by 1.4 million tonnes from the previous week to 26.57 million tonnes for the week ended June 21, mainly driven by increases from Australia, although it’s the Brazil freight rates that have really been driving the spike on Capes.

 

The iron ore market may be looking at the situation in Brazil through a different lens however, as the impact of the virus makes the claim by Vale that it will be able to fulfil its production targets despite the level of contagion somewhat extraordinary.

 

There’s doing a few extra hours to make sure you don’t miss a target and then there’s fulfilling an almost impossible pledge. Vale’s claim looks more like the latter category than the former.

 

Not everything is rosy. Chinese oil imports has not managed to raise market sentiment. The falling need for floating storage and the decreasing number of cargoes due to the OPEC+ production cuts has slashed VLCC rates from over $74/mt in mid-March to under $8/mt. With OPEC insisting that member countries stick to their agreed cuts, it doesn’t look like any change will be impacting rates in the near term.

 

Yet we hear the voices; “The recovery is starting”, “Demand is coming back” and the volume is likely to continue building. For many people it can’t come soon enough, but let’s see how things unfold in the next few weeks as more countries join in the relaxing of quarantine measures and the world tries to remember what normal looks and feels like. (FIS)