OPINION: Green shoots of a melt up

JOHANNESBURG – The Baltic Dry Index, an assessment of the price to ship raw materials, such as coal, iron ore, cement and grains, and generally viewed as a leading indicator of global demand for these commodities, jumped by a staggering 75 percent from a low in February.

This was after the shipping rates fell by more than 60percent as China’s industrial production in January and February fell by the most since January 1990 due to the disruption of the Chinese economy as a result of the containment measures to stem the Coronavirus outbreak.

According to Fung Business Intelligence, fixed investment and retail sales contracted at the worst pace since records began in the 1990s. The fall in the CFLP manufacturing purchasing managers’ index (PMI) for China was worse than the economy experienced in 2008 and the worst since the start of my records in 2004.

Massive economic stimulation by the Chinese government and the containment of the virus resulted in a restart of the economy. According to Fung Business Intelligence, by the end of March, 99percent and 77percent of large and small- and medium-sized enterprises had resumed production with 90percent of workers returning back to work. The response of China’s economy is truly remarkable. Amid the 2008/09 global financial crisis, it took four months before the PMI broke the 50point level on the upside to signal economic expansion. This time around, it took just one month to recover. The PMI reading of 52points in March was also the highest in 29 months.

The recovery in China has already begun impacting positively on commodity prices. The price of Brent crude oil futures for delivery in June is similar to Friday’s spot close and is therefore reflecting the current glut in the oil market. The global oil market is in contango though. The futures price of Brent crude for delivery in September is $35 (R656.36) per barrel or nearly $7 or 25percent higher than the current spot price of $28. The six-month forward contracts moved into contango in March after being flat in January and February and could reflect the major cuts in supply and an improvement in demand.