YANGON -- Commodities prices have begun rising from their long slump, providing good news for the embattled shipping trade. But uncertainty and ambiguity in China, whose demand dictates the prices of many resources, are casting doubts over how long the rebound can last.
The main drivers for the recent rise include China's continued domestic stimulus and the country's cuts in coal production, along with increased commodity speculation following the election of Donald Trump as the next U.S. president.
Prices of iron ore, the world's second-most shipped commodity after oil, have soared amid speculative trading and the promise of more U.S. stimulus spending. After trading in a range of $45 to $55 per ton earlier this year, the main ingredient in steel recently neared $80 but the rally soon faded and the benchmark price, according to Platts' The Steel Index, closed at $69.8 on Nov. 21.
Metallurgical coal, used in steelmaking, has more than quadrupled in price since the beginning of the year as China forced domestic miners to cut back on excess production, driving buyers to import more from Indonesia, Australia and elsewhere. Prices for thermal coal, used for power generation and heating, have doubled. China's coal output slumped more than 10% in the first nine months of 2016 compared with a year earlier, while imports rose 15.2%, after the government cut the number of days that mines could operate from 330 a year to 276.
The commodity price increases have lifted the Baltic Dry Index, a closely watched gauge of the rates charged by shipping lines to carry basic materials. The index marked a two year high of 1,257 on Nov. 18 after slumping to a record low of 290 in February. The index previously peaked at 11,793 in May 2008.
The outlook for iron ore prices depends significantly on China's property and infrastructure sectors, as the country consumes around half of most of the world's major commodities and is also the top importer of them.
"Construction demand for steel is strong in [the fourth quarter] this year, and infrastructure demand has been strong all year and is increasing in Q4," said Tim Murray, managing partner at China-focused research house J Capital Research.
Murray expects Chinese infrastructure demand will remain strong next year, though spending growth will fall 5-10% from this year. But he added that there has been no fundamental increase in demand for steel, saying that prices for steel and iron ore have risen due to speculation.
In an encouraging sign for the seaborne iron ore trade, Australia's Fortescue Metals Group, the world's fourth-largest iron miner, announced a $473 million deal on Nov. 14 with China Development Bank Financial Leasing for financing the construction of eight so-called very large ore carriers in China.
Given lingering concerns over the Chinese economy, however, few analysts are convinced that the commodities rally is sustainable. Even with a huge boost, U.S. infrastructure spending would remain dwarfed by overall Chinese demand.
"Into 2017, we expect prices to revert back towards cost curves, as the supply of key commodities adjusts to current windfall profits and speculative demand softens under the weight of falling prices," the Australian Department of Industry, Innovation and Science warned on Nov. 11.
J Capital's Murray also suggested that the price of iron has peaked, predicting it will fall to $50 per ton by year-end and average $40 to $45 in 2017.
Ambiguities in Chinese policy, meanwhile, are creating great uncertainty in global coal markets. To dampen the recent price rises as winter approaches, Beijing announced on Nov. 17 that some 800 mines will be allowed to increase production.
Analysts at Macquarie Group said in a research note that it remains unclear what effect the policy reversal will have on coal prices and that there is "clear skepticism from market participants that production is increasing, [as] there is no data yet to illustrate it."
But research company Wood Mackenzie said, "The higher benchmark price bodes well for the seaborne market, as 98% of the seaborne thermal coal market is expected to be cash positive."
Global shipping consultancy Drewry noted recently that "moderating vessel supply growth over the next few years together with a mild improvement in the outlook for seaborne trade will enable a reduction in chronic overcapacity and so mark a recovery in the dry bulk shipping market."
While that indicates a healthier balance between shipping supply and demand, a strengthening U.S. dollar could put a lid on prices, as the greenback usually moves in opposition to many commodities.
Michael Sainsburyisan Asia regional correspondent for the Nikkei Asian Review.