Dry Bulk Market Under Pressure From China’s Property Market Downturn

The demise of the dry bulk market since the start of October can be easily associated with China’s macroeonomic issues, the Evergrande issue and its impact in the Chinese property market. In its latest weekly report, shipbroker Allied Shipbroking said that “it’s been three weeks now of mounting retreats being noted across the board of the dry bulk freight rates and the many in the market have started to get jitters. Although in most cases rates are still holding up at relatively firm numbers compared to historical levels, it has been the speed in which this latest drop has been noted that has troubled most and caused many to re-evaluate their market position”.

“Yet this market drop has not been alone in causing such a rethink. There have been a number of macroeconomic figures coming out of China this past month that seem to be both the reason as well as potential leading indicators as to how we expect the next few months to transpire. China’s economic growth has slumped to its slowest pace in the year during 3Q21, growing by a mere 4.9% year-on -year between July and September. This is a considerable drop from the 7.9% noted in the previous quarter and considerably lower than the official target set out by Beijing for the year. At the same time, year-on-year growth in Chinese manufacturing activity (3.5%) and retail sales (4.9%) have shown some improved performance in October, though even these latest figures are still keeping in line with the overall trend seen during the third quarter”, Allied’s Head of Research & Valuations, George Lazaridis said.

According to Mr. Lazaridis, “the crippling factors have been numerous, as mentioned in previous insights, yet their negative effects seem to be compounding as of late. Evergrande’s missed bond payments last month, coupled with the strong price surge in commodity prices and crippling power shortages have all been strong dampeners on the country’s economy. China’s producer price index rose year-on-year by 13.5% in October, its highest level in more than a quarter century. While the country’s consumer price inflation has also been holding up at a relatively high level of 1.5%, in cases of some essential goods, price inflation has been considerably higher than this. Given the considerable drop in new building construction starts and the high level of contribution of the real estate sector (25%) on economic output, negative pressure has been building up at a fast pace and cast shadows over the sustainability of the strong positive numbers that China posted during the first half of the year. The “hit” noted on property investment and new building construction has been reflected in the drop in construction-related commodities such as steel and iron ore, reflected in turn in the shipping markets through the sharp drop noted in Capesize freight rates over the past month”.

“All this has undoubtedly sounded the alarm in Beijing, with the overwhelming expectation being that in the absence of any significant change in government policies, economic growth will slow down further during the final quarter of the year. As such, most economists do expect some action to be taken up sooner or later, though the results of any action will depend on what action the central party chooses to take up. For the time being, it looks as though the world’s second biggest economy and biggest manufacturer still has major hurdles to overcome and the resulting ripples are going to continue influencing global markets for some time. Everyone’s attention is now firmly on what China’s central government will do next to tackle these issues, while the hope is that the call to action within the party will be swift and have a strong enough impact to drive the economy out of this recent slump and back on its previous track”, Allied’s analyst concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide