By Ulf Bergman
The ongoing fallout of the Evergrande debacle is eventually leading to some political consequences. At the same time as Beijing appears reluctant to bail out the ailing property developer, the Chinese government has vowed to stabilise the economy as it is facing multiple headwinds. On Wednesday, the Chinese cabinet accordingly approved the 2021-25 plan for infrastructure investments, which seeks to stimulate domestic demand, promote economic transformation, and increase the growth potential. According to an estimate from the Industrial and Commercial Bank of China, the spending on infrastructure could reach 10 trillion yuan, 1.5 trillion US dollars, over the next five years. Preempting the new plan, data from the Chinese Ministry of Finance also show that August had the most significant infrastructure investments of the year, suggesting that Beijing is already engaged in some counter-cyclical activities.
The unwillingness to assist the troubled company is likely to be part of the same policy that led to the recent clampdowns on tech companies and wealthy tycoons. In line with one of the most recent policy slogans, “common prosperity”, financial assistance to a private enterprise burdened with debt seems unlikely. Investors and lenders are instead the candidates for shouldering the burden. However, while the company and its backers may not get any assistance, the millions of affected homebuyers are more likely to receive some form of support. A failure to provide help to the customers could harm the already weak consumer market and negatively influence political stability.
Assuming the Chinese authorities successfully contain the fallout of an Evergrande default. In that case, a significant slowdown in construction is likely to be avoided, and the sector’s steel demand will remain robust. With the newly approved infrastructure investment plan, the Chinese appetite for steel could increase even further. However, with extensive output restrictions for the steel industry, any increase in demand will likely push prices towards a new record and put additional pressure on the country’s economic growth. Much of the production curbs focus on the air quality for the upcoming Winter Olympics in Beijing, suggesting any relaxation of production curbs may have to wait until March next year. However, in the recent past, the Chinese leaders have said that environmental authorities should have a less dogmatic approach to any production restrictions, implying a limit to how much it will be allowed to curtail economic growth.
Despite the often grim headlines, the Chinese steel production is still high in a historical context, and global iron ore production is still below the highs recorded in 2018, before Vale’s dam incident. Hence, the iron ore market remains tight, with prices historically high and above the miners’ breakeven levels. Brazilian production is nevertheless recovering and will add additional downward pressure on iron ore prices.
The falling iron ore prices are of little concern for shipping, but the continued clampdown on steel production is of greater importance as it could affect the imported volumes of iron ore. The new infrastructure investment plan is, on the other hand, good news for dry bulk shipping. Even if it may not immediately increase steel and iron ore demand, it will contribute to healthy tonnage demand until the middle of the decade.
The seaborne volumes of iron ore are unlikely to continue to grow at the spectacular rates seen as China emerged from the first set of pandemic lockdowns. However, a tight tonnage supply situation, with only a limited number of vessels expected to join the global fleet, will contribute to healthy freight rates in the coming years. The current tonnage supply situation is also susceptible to disruptions, with not much spare capacity available.
The current congestion in and around many ports in China have contributed to the Baltic Dry Index reaching its highest level since 2009. A record number of vessels are currently waiting to discharge their cargo, but pandemic-related delays keep the ships idle. The extended waiting times is reducing the tonnage supply and push freight rates higher. As long as the coronavirus remains a problem, port closures will create supply-chain bottlenecks and congestion, which is terrible news for the shippers. Still, great news for the shipowners as tonnage supply gets decimated. Hence, the outlook for dry bulk charter rates remains positive.
