Ship Shape – Global Boom or Global Bust?

The Battle of Marathon, the Sacking of Rome, Einstein developing his theory of General Relativity, the Great Depression, The Second World War, the birth of John B, the launch of the PlayStation 2. All are seismic events that have forged and influenced human history.

These and so many other events had a profound effect on human society, our understanding of the world and the history that followed them. Some of these events are inevitable and to a certain extent predictable; others were the result of accident, reaction, or divine intervention that gave us the world we have today.

This is not to argue that our lord saviour John B is not the next Messiah – I will leave that up to the reader here to decide this – but more that in events like these are the beginnings of events that have not yet come to pass.

The question that now befalls us is what happens next for the world economy post covid-19. With news stories of promising vaccines, more countries bringing the virus to manageable levels and others seeing it run further out of control, will this moment mark the point at which we see a new global boom and recovery, or will this be the hold before the plunge?

If you had commodity myopia and all you could see was what was happening on iron ore, then you might be asking not if there will be a boom, but rather how big and whether it is going to stop? Chinese return to business and increased demand has injected steroids into sentiment, keeping prices over the $100 mark.

These same factors have also been giving support to oil prices, with China reporting record oil imports for the last two months. Is this the start of a commodity boom whereby everywhere has increased demand for fuel and raw materials to build their way back from the virus brink? We have already seen a commitment from the European Union and recently the United Kingdom on stimulus packages to build and grow their way out of the severe economic contractions of Q1.

Many are expecting the United States to put forward a further stimulus package before the end of the year and there will surely be others who also follow the lead of the Europeans.

With the recovery in commodity rates over the last few weeks, there are arguments for a continuation of the trend. Brent crude has clawed its way up to $44 and dry freight rates have fallen back from over $30,000 per day for C5 to just over $20,000, and Panamaxes dropped from 16,000 to 11,400. Increasing economic activity could kickstart a new push on all commodity rates.

With OPEC relaxing its cuts by 2 million bpd with the potential for more and increasing prices, the effect could ripple through to tanker rates as the number of cargoes increases. They are currently languishing around $8.5/mt on front month VLCC futures but could be given a significant boost if other countries follow China’s lead on oil imports. The increase in exports of iron ore from Brazil and Australia, or even things like more of the current demand for fertilisers from India, could all drive up transportation and commodity rates in a similar fashion to tankers.

But as with any of these factors there is also another side; that of the bearish weaknesses that could explode and ruin everyone’s day. The big problem that could put a spanner in the works is the increasing escalation of tensions between the United States and China.

Be it the trade war that has been going on for what now feels like an eternity, or the proxy war over Hong Kong and the new security law, it could be a relationship that if it sours further there’s only going to be one loser: everyone. The US election is in November and China must rekindle its remarkable economic growth to keep the Communist party secure, so perhaps there are internal issues later this year that will detract from this peacocking in international relations.

Even if we avoid a blow up between the world’s superpowers, there are plenty of other situations that could result in escalations with different results. For example, we could again get problems arising from North Korea as it raises it head on the world stage to cause problems by threatening nuclear war, or even the question of what to do about Iran and its current state of sanctions.

Both could raise the threat of conflict and drive up prices of commodities like oil and iron ore, especially if it affects bottlenecks like the Strait of Hormuz or access to China. Or will we have a period of time where everything is chilled and everyone is friends, sitting around in a circle holding hands and singing kumbaya?

Much of the near future will be coloured by the world’s ability to deal with the virus and any future outbreaks. If current trends continue then it will be Europe and China that deal with it best, with the United States, South America and Africa really suffering to contain and manage the outbreak. If you are a left-of-centre middle class yuppie the ‘best case’ outcome to what has been a torrid 2020 would be a Biden US President, an effective Covid-19 vaccine, independence for Hong Kong, a China-US trade deal, a soft Brexit, a booming global economy, huge investment in renewable energy, the eradication of all poverty and inequality, and a world where the sky rains Skittles in rainbows of edible goodness every Friday.

But alas, we live in the real world that is more complicated and unpredictable than we like to admit. We could therefore as easily end up with a fourth wave of the virus, mass unemployment, freight rates collapse, retrenchment of globalisation, One Direction reform, wildly divergent demand between different parts of the world, a controversial and challenged US election, a new (and much harder) Cold War between China and the United States and a grim outlook for global growth.

Global boom or global bust was the question. Who knows, is the answer.