China and India Lead the Dry Bulk Market’s Rebound

A lot has been said regarding the dry bulk market’s rebound and future potential, however, much will come down to China’s and India’s dry bulk commodities’ demand growth, most notably iron ore and coal. In China, shipbroker Banchero Costa recently said that “Chinese steel production has proved surprisingly resilient this year, as the government pushed forward more infrastructure and construction investment to compensate for the negative effects on jobs and growth that the trade war is having on the manufacturing sector. China’s crude steel output hit a record high of 89.09 million tonnes in May, up from 85.03 million tonnes in April and 81.13 million tonnes in May a year ago, according to data from the National Bureau of Statistics, even as a jump in prices of raw materials, particularly iron ore, cut into mills’ profit margins”.

“However, in the first five months of 2019, China imported just 423.92 million tonnes of iron ore, which was down 5.2% on the same period in 2018, according to customs data. The figure for May, the last month available, was 83.75 million tonnes, up 3.7% month-on-month from April but down 11% year-on-year from May 2018. Unfortunately for the shipping industry, this is almost entirely due to iron ore supply constraints in Brazil, and to a smaller extent in Australia, and the skyrocketing price of this commodity. Spot iron ore prices have jumped to the highest levels in more than five years, with benchmark 62% fines for delivery to China at $117 a tonne at the end of June, according to data by SteelHome. Even the recent restart of the Brucutu iron ore mine in Brazil has brought no much relief, with the iron ore market expected to remain tight for the foreseeable future”, said Banchero Costa.

According to the shipbroker, “Rio Tinto last month lowered its guidance on iron ore volumes it expects to ship this year from the Pilbara region in Australia for the third time since April, citing operational problems. It’s not surprising, therefore, that steel mills prefer to run down domestic stockpiles rather then bid for new imports. Iron ore inventories at China’s 45 major ports have fallen to 116.75 million tonnes at the end of June, down 21 percent from a recent peak in March, and the lowest level since the start of 2017. Steel mills are also starting to prefer lower grade iron ore. Iron ore with 58% content for delivery to China, as assessed by Argus, has narrowed the gap on higher grade 62% ore. Whilst at the start of the year 62% ore commanded a 14.6% premium over the 58% grade, by the end of June that had shrunk to just 7.2%. If iron ore continues to rally, or even remain at elevated prices, it’s likely more Chinese mills will be tempted to switch to lower grade ore, which will benefit Australian exporters, but also provide some lifeline to the moribund domestic Chinese mining sector. Domestic iron ore mines are producing more iron ore, while mills have also sharply increased the use of scrap in the converter burden to cut back on iron ore usage, according to the China Iron and Steel Association. However, increases in domestic mining output has been limited, at just about 1.2-1.5 percent year-on-year, due to strict environmental regulations and high production costs”, said Banchero Costa.

Meanwhile, in a separate dry bulk trade, i.e. Indian coal imports, Banchero Costa said that “during the first quarter of 2019 the most dynamic and fastest growing major commodity was coal which grew an estimated 7% compared to the first quarter of 2018 to over 310 million. Whilst imports into China and Japan the first and third largest importers were slightly lower during 1Q19 compared to same period of 2018, there was a very large number of countries where imports recorded two digits growth (in a few cases three digits growth); to name the largest India, Taiwan, Malaysia, Thailand, Vietnam, Pakistan, Bangladesh”.

According to the shipbroker, “it is clear that with the economic development the Subcontinent and SE Asia are quickly becoming the new sources of demand for the coal trade. The single largest driver was India with imports that increased 14% (1Q18 vs. 1Q19) to over 56 million. India is set to rival China again as the largest importer of coal in 2019, a record briefly detained in 2015 and 2016. Where is India sourcing all this additional coal? SE Asia (i.e. Indonesia) exports to India only increased 2%, whilst imports from North America, both from the Atlantic and Pacific basins increased 41% and 35% respectively; a lot more coal was also imported from Australia +12%: not only India is importing a lot more coal, it is also importing it from further away. If we compare coal imports in 1Q17 and 1Q19 we can see that despite the trends just described above the share of imports by each vessel size did not change much with Supramax sourcing 22% (was 21% in 2017) of coal, Panamax 40% (was 37%) and Capesize 29% (was 28%). One would believe that importing a lot more and from further away the vessels’ choice would move to bigger units, but, mainly due to port restrictions, this is not the case for Indian imports that offer good demand growth both for Supramax and Panamax and also for Capesize”, Banchero Costa concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide