By Nick Ristic
Last week, China’s National People’s Congress approved the country’s 14th Five-Year Plan, setting out the long-term direction of the economy. We summarize the key points that will affect the dry bulk market.
Five year plan released
Five-Year Plans (FYPs) are not an exact blueprint for how China’s economy will perform over the next half-decade, and should not be taken at face value. However they do provide an insight into how authorities plan to direct the economy, and which sectors will be supported.
Policy changes in this particular economy are especially relevant to the dry market, given China’s enormous (and growing) share of dry bulk employment. As we have written previously, Chinese imports accounted for around 46% of total bulk carrier demand in 2020, up from about 36% in 2015. In this calculation we account for durations of all voyages completed, including time spent ballasting. For the Capes, this figure is significantly higher: the country accounted for two-thirds of demand last year, up from 54% in 2015. Across all sectors, this share hit record highs in Q3 2020. With industrial activity around the world still subdued with the pandemic, China was firmly in the driving seat in terms of global raw material demand.
No GDP targets
Absent from the most recent FYP was an explicit goal for GDP growth over the next five years. Over the past few years annual GDP targets have often been set ambitiously high to meet the long-term goals of the FYP, and they are notorious for encouraging inefficiency and excessive spending.
This time, officials will only set GDP targets annually, giving them more flexibility to adapt to macroeconomic trends. The FYP has also sketched out how GDP growth should be split by sector. Manufacturing, a key driver of raw material requirements has fallen as a share of GDP since 2015, being squeezed by a rising portion of growth driven by the service industry. Services have helped to keep growth rates high, but the increased weight of industries such as finance and technology have also increased the levels of economic and political risk in the economy.
In the 2021-25 plan, authorities seem to have shifted their focus, aiming to keep the share of manufacturing in GDP stable for the next five years. Within this broad aim however, there are other ambitions that could lower the dry bulk needs of this sector.
Technological push and self sufficiency
Regarding this repositioning on manufacturing, a key theme in the FYP is self-sufficiency, particularly when it comes to high-tech industries. One of the main targets has been to increase the share of Strategic Emerging Industries (SEIs) from 11.5% of GDP in 2019 to more than 17% by 2025. Examples of such industries include semiconductors and electric vehicles, which have a mixed impact on dry bulk demand. The latter, for example, still requires steel and aluminium, though in smaller quantities than tradition automobiles, while projects focusing on technological innovation will be less demanding of raw materials.
Concerns over import reliance for high value goods have pushed authorities to provide more support to this sector via greater spending on research and development. As such, while a renewed emphasis on manufacturing is encouraging, it is these newer spaces that seem to be the main growth areas going forward.
The self-sufficiency theme also extends to other areas of the economy such as agriculture, but here there are clear trade-offs that should insulate shipping. Chinese demand has driven the rapid rise in grain trade over the past decade, as an expanding middle class has boosted demand for meat, and thus animal feed. Low-cost grain producers such as Brazil and the USA have been well positioned to take advantage of this demand, which has in turn provided critical long-haul trade opportunities for Panamaxes and geared ships. China currently accounts for a third of dry bulk demand generated by the grain trades versus around a quarter in 2015.
While China has stated its aims of increasing its production capacity and curbing reliance on imports, its shortage of suitable land and irrigation mean that costs are relatively high. Foreign producers will retain their comparative advantage for the foreseeable future and it will be tough to wean Chinese buyers off of this cheap supply. As such we are not too concerned over the prospects for the county’s grain imports and expect growth in this market to continue.
Shifting away from traditional industries
As a result of the aforementioned technological push, ‘traditional’ sectors, such as heavy industry and construction are set to receive less support than in the past. The 14th FYP also implies a decrease in spending on traditional infrastructure, a key consumer of steel. With China’s infrastructure already fairly advanced for a country at its stage of development, we are seeing fewer resources channelled to this sector.
For example, according to estimates from Capital Economics, this FYP implies that growth in construction of new expressways over the next five years will fall to 2.9%, down from 5.6% over the last FYP. Meanwhile, expansion of urban railways over the current FYP period is expected to fall from 18.7% over 2016-20 to 6.9%, while growth in the construction of social infrastructure, such as hospitals, is expected to fall from 5.5% to 0.6%. This tapering off means that raw material demand from these projects will still be enormous in quantity, but they will not drive the same growth in steel consumption that they have over the past decade.
Property, another key market for Chinese steel, is on a similar trajectory. Pledges to maintain growth in China’s urbanisation rate should continue to provide support to the construction of new homes, but again, we expect this growth to be slower than in previous years.
Authorities have repeatedly stated their aims to limit speculation on housing and have tightened their grip on mortgage and development lending.
Despite last year’s stimulus policies having a positive effect on infrastructure and manufacturing, construction of new homes contracted by 1%. We don’t expect growth to remain in negative territory, but it is likely to remain constrained by these policies.
Environment
Focus has also intensified on environmental policies, which also clash with traditional growth engines in the economy. On top of President Xi’s pledge that China’s CO2 emissions will peak by 2030, the FYP also targets an 18% reduction in the CO2 intensity of economic growth. This is roughly in line with the reduction over the last five years, but it will be difficult to maintain this pace if manufacturing is to maintain a stable share of economic growth. This again hints that manufacturing will have to become less energy intensive and likely more focused on newer industries that are less supportive of dry bulk imports. Targets for improving water-usage efficiency and air quality also signal a tougher climate for established manufacturing industries going forward.
Crucially, these goals seem to have been deemed more important than pure economic ones. Most of the green targets are marked as “binding” in the FYP, while many others are “indicative”, meaning that should two come into conflict, the environmental goals are in theory to be given priority. This is not necessarily a bearish sign, given the efficiency improvements that can still be made, though greater environmental pressures also increase the likelihood of last-minute crackdowns on certain polluting sectors, which we have seen hit shipping markets in the past.