naked capitalism

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