Metal Smelting: A Major Driver Under Pressure
Tuesday, 14 February 2012 | 00:00
More than 50% of dry bulk trade is in some way tied to metal smelting processes such as steel and aluminium production. Thus declining hot metal output can have a stark influence on the dry bulk market. While iron ore and coking coal are the most obvious related commodities, several minor bulks are also used or produced by these processes. Together, these minor bulks account for a not insignificant 16% of dry bulk trade.
In recent months, global steel production has begun to decrease. Production totalled 115.5mt in November, down 10% from the 130.0mt produced in May. China accounted for 70% of this drop, as apparent demand in steel intensive industries has trended downwards. Steel and aluminium production also fell in Europe in the second half of 2011 due to the impact of economic troubles and the closure of a number of blast furnaces.
As the Graph of the Month shows, the trade in minor bulks dependent on metal smelting is closely correlated to steel production. Hence it is not surprising that the recent production drop has begun to dampen trade. In the third quarter of 2011, estimated global coke exports were 16% lower q-o-q, scrap exports were 5% lower, and pig iron exports were 12% lower. While the decline has so far been minimal for steel products, bauxite and nickel ore, the sustained production drop over Q4 suggests that total trade during the quarter is likely to be further reduced, as shown on the graph.
While global steel demand continues weakening, the trade in these minor bulks is likely to fall. This is the main driver behind projected minor bulk trade growth of 3% in 2012, down from 5% in 2011 and 11% in 2010.
That’s Rather Handy
Trade in minor bulks produced or consumed by metal smelting in 2011 is estimated to have totalled 576.5mt, or 48% of minor bulk trade. If production and trade dropped substantially, this could affect the Handy market. However, several factors may help minimise the impact. The cargo versatility of Handy vessels means that they are in a good position to carry minor bulks unrelated to metal smelting such as agribulks and fertilisers; the trade in which is projected to grow 3% in 2012 without being subject to downside risk from slowing industrial production.
Also, if lower overall trade volumes do result, then Handysizes are best placed of all the bulk sectors to correct oversupply through demolition. They are the oldest bulkers on average at 15.8 years, and have the smallest orderbook at 21% of the fleet, so that projected fleet growth is slower than for the larger vessel sectors.
Lower steel demand has already begun to affect the trade in minor bulks tied to smelting processes. Ultimately, the extent of the production drop will define the level of market impact. However, Handysizes may be relatively better placed than other sectors to cope with such a trade downturn.
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