Although talk of deep OPEC production cuts and hopes for an auto industry rescue have given oil prices a boost, the fundamentals are far from out of the woods. Indeed, as OPEC bravely claimed demand and supply really weren’t so far out of whack (was that at effort to set the stage for a less-than-hoped for 2 million barrel a day output cut?), oil maven Philip Verleger said the oversupply was far worse than widely acknowledged, 7.7 MBD. So if you believe Verleger, even if OPEC made a big cut, the world would still be sloshing in more oil than it needs.
An indirect confirmation of likely further deterioration in demand before things turn around comes from some reports tonight on China. China reported that industrial output in November was a mere 5.4% over the previous November, below any analysts forecast and the 8.4% year to year increase in October. And electrical output, which some see as a key barometer of economic activity, fell 9.6%. From Bloomberg:
China’s industrial production grew at the weakest pace in almost a decade as export growth collapsed, increasing pressure on the government to do more to revive the slumping economy….
China’s economic growth may slump to 5 percent in the first half of next year, less than half of the 11.9 percent expansion in all of 2007, Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong, said today.
China’s economic slowdown contributed to Australia, the world’s largest shipper of coal and iron ore, cutting today a forecast for its commodity exports for the year to June 30, 2009, by 10 percent.
“Commodity-producing countries will be very worried,” said Huang Yiping, chief Asia Pacific economist at Citigroup Inc. in Hong Kong.
Industrial production is plunging around the world as demand dries up. China’s electricity output fell by 9.6 percent in November from a year earlier, today’s figures showed. Pig- iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.
Experts were alarmed at China’s fall in electrical output last month, which was down a mere 3.7%.
In what seemed to be a contradictory and positive development, the Financial Times reported, rather breathlessly, that “Shipping charter rates soar.” However, with all due respect to the FT, which is far and away the best single financial news source, shipping is really not its beat. If you read the piece, you quickly find that the hyperventilating is a tad overdone:
One of the world’s key shipping markets has begun to recover from a slump, with a revival in Chinese demand for iron ore and coal pushing some average charter prices up almost threefold in the past week.
The revival in prices, after a disastrous six months for the industry in which charter rates fell nearly 99 per cent for the largest vessels, could encourage shipowners to bring mothballed vessels back into service.
One participant said yesterday that some owners were able to charge enough to cover the costs of operating Capesize ships, the largest dry bulk carriers. Average rates for these ships, which move coal and iron ore, have nearly tripled over the past week.
However, smaller ships have yet to show the same recovery as Capesize vessels.
So read that carefully: rates for the big ships have tripled (for one week) to the point where owners can now cover the cost of operation! Hallelujah! Moreover, if these were the rates that fell 99%, they have gone from 99% yo 97% of their prior peak.
In fairness, the FT story did sound cautionary notes:
The return of mothballed ships to the market could lead to a repeat of the over-supply which, combined with disappearing demand for coal, iron ore and wheat, depressed prices this year.
“There are a lot of ships still sitting in semi lay-up,” said Mr Richardson. “As soon as you start to get over these operating costs, they’ll reactivate themselves and get moving.
In addition, some news stories from Lloyds, “Brokers warn capesize rates rise may be a false dawn,” (hat tip reader Michael) take a bit more air out of this seeming good news:
With capesize owners at last being able to celebrate charter rates rising to cover operating costs, brokers cautioned that this “glimmer of hope” could be a false dawn, writes Keith Wallis.
“More cargoes have been fixed for loading over the Christmas and New Year period. But Chinese New Year is early, with the Year of the Ox beginning on January 27. The combination of these three holiday periods could dampen sentiment,” warned one Hong Kong-based broker.
Another was blunter. “There are more cargoes coming out. But its going to be a tough Chinese New Year — its not going to be good for us,” he said….
But warning of more woe ahead, the broker added that the collapse last week of the US government’s $14bn bail out of the country’s big three auto makers, coupled with falling demand in China and negative sentiment worldwide will adversely impact shipping markets.
Brokers said the capesize sector may also be unsettled by opposing market rumours about the state of talks between iron ore producers and Chinese steel mills. Market speculation last week that talks had started was later followed by rumours that discussions had yet to begin.
One broker thought foreign ore producers would push for a 50% price rise, although the final price increase “could be around 30% — a minor reduction in price rise expections will not be good enough,” he said
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It’s a no risk bet that China will be in recession next year, if it isn’t already. The situation there since July has deteriorated rapidly. We are seeing sharp declines in exports, consumption across the board.
Massive layoffs and protests are already taking place. This does not bode well.
I also have to wonder how reliable the data is? The stock market started tanking a while back, so the economy has been weak for sometime over there.
…before things turn around…
I think that will be a long wait.
Looks like the race to the bottom of currency depreciation has started with the "Dollar Staggers as U.S. Unleashes Cash Flood, Deficit" http://www.bloomberg.com/apps/news?pid=20601087&sid=azuNjokrEk88&refer=home while China is increasing it's money supply by 17% next year. http://finance.yahoo.com/news/China-to-increase-supply-of-apf-13825807.html This will be really interesting.
“Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into,” Lou said at a conference in Hong Kong. “My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?”
Amen to that. The Wall Street that Paulson and the North Eastern Congressional block represent have put the US in grave danger.
Academia is of no use, like a boat with a broken rudder, mindlessly going in idealogical circles of wrong headed analysis. Perhaps Stiglitz is still rational.
The reset button of economic misery appears to be inevitable. The other choices are out of reach.
Glen,
Thanks for the link to the Bloomberg story.
It looks like the “experts” are all over the map, but with the Fed flooding the world with $8.5 trillion of new $$$$ and still counting I think that, in the deflaton vs. inflation debate, those who argue that deflation is the only possilbe outcome are deluding themselves.
Anonymous at 6:50 a.m.
Amen to that.
Until the unholy alliance between economic power and political power is broken, there is no hope for America.
don’t know if this link will work – I am an Atlantic suscriber
http://www.theatlantic.com/doc/200812/fallows-chinese-banker
Interview in which the banker says that America should be nice to the countries that lend it money.
HA HA I think we’ll be nice, but I also think we will be paying the Chinese in devalued dollars for a long time
Capesize is obviously recovering. There’s been a big improvement in the Capesize anchored rate too. My guess is that the stocks built up during the commodities boom have been exhausted and now they’re having to move supplies again. Also remember Capesize move grain and there’s a real sharp limit on how long that can be put off.
However, the BDI is still insanely low and at depressionary levels. This is more of an indication we’re not facing Mad Max.
Rates are down 97% and are now just about enough to cover costs, ie previously rates were around 30 times higher than costs?
Somehow I find that hard to believe.
If things in China are this bad, how can iron ore producers expect to get 30-50% price increases?
In this crisis, the US is guilty of commission on multiple fronts…that’s a well established and, frankly, belabored point.
But China is equally guilty of ommission. I mean, what good are China’s reserves if they don’t have a domestic economy? That’s the whole point of trade…use the surplus for the benefit of its own people (social safety nets, healthcare, education, etc) rather than just building a bunch of roads to nowhere.
China is reportedly allocating a mesely $6bn of the $550bn stimulus to — education and healthcare…that is, imo, tantamount to the US dishing out $150bn in the hopes consumers will spend $500 at Target instead of shove it in the bank or pay off credit. Recklessly counterproductive.
As Pettis points out in FT today (see Yves’ links from today):
“A decline in US consumption equal to 5 per cent of US GDP, for example (which is a low estimate), would require an increase in Chinese consumption equal to 17 per cent of Chinese GDP – or a nearly 40 per cent growth in consumption.”
So, as he lays out, China can go two ways: 1.) cultivate a domestic economy or 2.) increase exporting capacity in the hopes that the US, EU, et. al will continue consuming.
Obviously the latter is a road directly to great depression pt 2 and it certainly feels like they are on that road.
“Rates are down 97% and are now just about enough to cover costs, ie previously rates were around 30 times higher than costs?”
Your skepticism is well placed. When they say “enough to cover costs”, they don’t mean they will break even and literally cover costs (debt, fuel, crew, etc.)…
What they mean is that it costs them $1000/day (paying for anchor fees, maintenance, etc.) for the ship to be sitting idle in a bay somewhere. Rates were so low before… running the ship would lose the company more than the $1000/day (paying for operation, crew, maintenance, etc. before the cost of the ship is accounted for) because the rates were “below cost”. It was cheaper having the ship doing nothing than to run it. All they are looking for is positive operating cash flow… if they get this, the ship will run.
However, shipping companies are not expecting these costs to cover their debt payments on the ship… so in reality they are still running the ship at a loss…
This is because they have a huge debt burden to cover whether the ship sails or not and if they can get even 10% of it paid for by a customer, it will help the company survive that much longer.
I should say…
Wealth is not about the amount of money.
But the amount of activities represented by said amount of money.
In charting, especially in today’s markets, overshooting is almost the rule. You overshoot on the up and down sides.
Normally free markets would find equilibrium all by themselves but with Governments beginning to interfere with free trade, things only can get worse.
Keynes will be tested.
The electrical output decline is really dramatic, even allowing that some industries are power hogs vs output.
China has the inclination to follow Kenyes I believe, and here will be a real test, perhaps even decisive!
That would be something.
ah, remembered a complication re China testing Keynes.
China has a culture.
It’s different, for instance children are expected to care for their parents.
That kind of thing creates a radically different savings pattern that is culturally determined more than determined by our style of economics with it’s certain presumptions about behavior.
oh well….
But perhaps China could try something more direct, like vouchers to purchase goods, only useable during a limited period of time.
Via Platts:“[Chinese] gasoil stocks [are] still high due to dramatically shrinking demand for the grade,” the source said. This is because the mainly transport and industrial consumers of the fuel have either reduced or shut operations as the economic slowdown bites…As a result, China has been a net exporter of gasoil since October after a 15-month stretch of being a net importer of the product, Chinese customs statistics showed…”We are expected to export around 200,000-300,000 mt of gasoil in December in order to ease the pressure of high gasoil inventory,” the Sinopec source said, noting that the export price of gasoil was lower than the production cost.”
Its a temporary comeback. The int’l commodities trade is still figuring out what to do with all this cheap shipping. Arbitrage type values on spot shipments are popping up everywhere. Ha, brokers are so desperate to get things done they are leaking potential trade ideas to the market in the hopes of getting something done (those two-faced bastards). Once demand really starts to fall of in China, you will see a rash of bankruptcies.
In the bankruptcy sell offs no one will be in a position (and neither will the market pay reasonable rates for the use of dry bulks, handy, panamax on up) to buy, hold, store and incur interest on the costs of purchasing these ships. And NO ONE will risk cash on floating iron right now. When the liquidations occur, guess where scrap steel prices will go?
Eventually these ships will be worth something again. But that is a long, long ways away.
Guess what these ship builders are going to do in the meantime? Guess what the shipping companies will do? Guess where all the freight brokers will go?
Answer: Davy Jones’ Locker
Thank you for this nice article.