Source: Baltic Exchange, LME

A concise summary of what’s moving markets, the impact on base and precious metals, including Theme of the Day.

What’s moving markets?

• Global equities tumbled after higher-than-expected inflation indicators in the US as investors worried the Fed would tighten monetary policy sooner and more abruptly than expected. The annual inflation rate jumped to 4.2%, the highest in 13 years and well above forecasts of 3.6%, while the monthly gauge rose 0.8%, the most since 2009, and the monthly core inflation increased to 0.9%, the highest since 1996. Both Fed officials and many investors remain confident that the bout of inflation will be temporary. Meanwhile, Republican opponents of President Biden’s spending plans are pouncing on rising inflation to caution against further government spending. Both 10-year Treasury yields, and the USD rallied on the higher inflation readings.
• Companies are preparing to launch a record wave of share buybacks as executives get comfortable with spending excess cash following a blockbuster earnings season and greater clarity on the trajectory of the world economy. US companies announced $484bn in share buybacks in the first four months of this year, the highest such total in at least two decades, according to Goldman Sachs.
• Gold came under heavy selling pressure, bottoming around $1,820/oz as a stronger USD and soaring Treasury yields drove flows away from the non-yielding metal. The rest of the precious metals complex was dragged lower as well, with palladium losing the most and falling below $2,900 in response to its sharp gains over the past few weeks taking prices above $3,000.
• The base metals sector was downbeat in the wake of the US inflation readings and risk reduction was the theme across the metals complex as China lending growth slows (but still the 2nd highest ever April recording of New Yuan Loans in CNY). A slowing credit impulse does not bode well for industrial metals as the Chinese government is unlikely to resort to more infrastructure spending because of the already high debt load. On a more positive note, any weakness in China could be mitigated by stronger growth in the US and Europe as “green” stimulus spending gets underway. Buying the dips should support the downside on expectations of stronger for longer demand and potential supply hiccups – the market is watching BHP wage negotiations. This adds further risks to already strained copper supply, following shortages of sulphuric acid and a tax hike that could make new investment unattractive. These supply-side issues are coming at a time when demand is rising strongly. The slide in ferrous prices affected those metals most closely allied to it (Ni, Zn and Sn).
• New trading limits and higher margin on futures contracts took the heat out of the ferrous markets, capping the advance in red-hot iron ore and steel. Restrictions on steel output in China appears to have also brought forward some demand from the important housing and construction sectors. Outside China, the economic recovery is also fuelling growth in demand for iron ore.

Theme of the Day: Bulk shipping costs at decade highs due to commodities boom

• China’s insatiable appetite’ for iron ore and other metals & minerals is a key factor in the surge in the Baltic Freight Index to its highest level in a decade, according to the Financial Times. A return to strength for manufacturing in the rest of the world and under-investment in new vessels in recent years have been additional factors. Not surprising, there is a positive correlation between the freight index and metals prices (LMEX).
• The Baltic Dry index (BDI), which tracks rates for the three largest classes of ships, has risen to its highest level in more than a decade, soaring over 700% since April 2020. Capesize vessels, the largest type with an average capacity of 180,000 deadweight tonnes, are fetching $41,500 a day for immediate hire, close to double of a month ago and almost eight times last year’s average. The BDI is reported daily by the Baltic Exchange in London and provides a benchmark for the price of moving the major raw materials by sea. The BDI considers 23 different shipping routes carrying coal, iron ore, grains, and many other commodities.
• The sector has been plagued by an overcapacity of ships since the 2008-9 financial crisis, despite robust demand growth for raw materials. Fiscal policies to stimulate economic growth, the clamour to refill depleted inventories and the muted supply of new vessels is expected to support higher prices. An uptick in container shipping markets from autumn last year, which preceded the rally for dry bulk vessels, spurred a wave of orders for shipyards, delaying the delivery date for any bulk vessels ordered now.
• Global regulation under debate could force ships to slow steam to reduce carbon emissions from 2023, which would constrain fleet availability. Another catalyst is that by 2023 new regulations on ship designs and emissions are expected to be introduced. Approximately 75% of the dry fleet would not be compliant with the new regulation.