BRS DRY BULK WEEKLY NEWSLETTER





Between The Promise of Tomorrow & The Reality of Today


In our earlier issue dated 13th April, we dissected several talking points that shaped India’s narrative as an alternative to China for decades to come. Now, it is worth looking at the structural factors of why India’s outlook should be steadfast at a time when the global economy is pitching in heavy seas.


The Ministry of Commerce and Industry data suggest that India’s merchandise imports value has hovered above USD 400 billion, while exports were circa USD 300 billion from 2016 to 2020 until the pandemic lockdowns came into force. India exports surpassed the USD 400 billion mark for the first time in fiscal 2022, registering an impressive growth of 44% Y-o-Y. Meantime, imports followed up with a of 55% Y-o-Y growth, crossing the USD 600 billion mark through the same period. As pandemic restrictions were lifted, pent-up demand for services and increased industrial production fueled India's economy. Heading into the 2022-23 fiscal year, exports have printed an all-time high of USD 450 billion, whereas imports rose widening the trade deficit. Strong domestic demand indicates import growth at a time when export remains subdued.

In the short-term perspective, merchandise exports may falter as several Indian key trade partners show a slowdown in demand, and recovery could take longer than expected. Nonetheless, the longterm export outlook remained unblemished with Piyush Goyal - Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles, expecting Indian exports to reach USD 1 trillion by 2030.

A similar trend is observed in the Indo-Pacific’s sea-borne cargo growth (see below chart).

UNCTAD (the United Nations Conference on Trade and Development) data reveals that the global maritime trade (including finished goods) during 2020-21 fiscal year fell into negative territory, dragged down by lockdown measures. Although it picked up to 1.4% Y-o-Y in 2022 amid inflation and uncertainties, the growth remained at a muted 2.1% in 2022-23 due to limited consumer spending. This is below the average of 2.5% recorded during the three years before the pandemic. UNCTAD expects a similar trend (2.1% – 2.5% range) to continue until 2027.

In contrast, Indian Ministry of Shipping data indicates that India’s maritime trade increased by 10.4% in 2022-23 fiscal year on the back of rising capital expenditure and various government initiatives that have been supporting consumer sentiment. Maritime transport represents about 95% of India's trades in volume and about 70% in value, thereby serve as a strong support to the country’s growth as compared to the world.

Despite global supply chains continued to be disrupted by lingering geopolitical tensions, Indian economy has evidently performed better. Several key industries played an essential role in achieving this.

India's eight core industries (coal, crude oil, natural gas, petroleum refinery, fertilizer, cement, steel, and electricity), or ICI, account for over 40% of India's industrial production index. Whereas the ICI is the leading indicator of the global country industry and overall economy, Petro refinery, steel, and electricity carry the biggest weight in ICI.

The combined Index of eight core industries has registered a substantial 10.4% growth in 2021-22 over the last year. The largest contributors to this growth were cement (+20.8%), Natural Gas (+19.2%), steel (+16.9%), and coal (+8.5%). The momentum continued in 2022-23 when ICI reported 7.6% cumulative growth Y-o-Y, whereby coal remained the major contributor at +14.8%.

Some of the ICI’s are responsible for driving India’s role in the dry bulk market and are therefore worth looking at.

Electricity - The data released by the Power Ministry of India shows that the country’s electricity sector has been significantly growing, mainly supported by power demand in commercial activities. While the Central Electricity Authority (CEA) estimates India’s power generation to grow by almost 9% y-o-y through 2022-23, power demand is forecasted to reach 817 MW by 2030 from the current 416 MW, giving good prospects for the coal market.

Coal - As it turns out, thermal coal is crucial for India’s power sector as it accounts for 49% of the total electricity generation. Availability became a challenge as heightened economic growth coincided with rising international coal prices, meaning that the power sector (state, central, and private) had to curtail coal imports drastically in 2021-22. Consequently, the Ministry of Coal undertook actions to address the supply constraints.

Measures include self-reliance in coal production through various policies and initiatives which helped India to increase production over the past two years. Ministry of Coal data suggest that domestic production in India has surpassed its 2022-23 target of 868 mln mt by 24 mln mt (+14% Y-o-Y). If similar trend persists, the country will achieve its ambitious target of producing one billion in 2023-24, a year ahead of its projection (2024-25). Rising production could raise concerns over the long-term import upside.

Coal demand recovery coincides with India's overall electricity demand. Acknowledging the seasonality and logistics constraints limiting output, the Power Ministry has facilitated power utilities to import. Coal imports in India is a price-sensitive affair, thus discouraging private utilities from importing when coal prices were elevated. In contrast, the state and central utilities, in 2022-23,imported 52.9 mln mt for the first time under the government’s directive, up from an average of 22 mln mt in 2019 and 2020 fiscal years for blending purposes, the CEA data revealed.

Growing power demand stimulate larger parcel size shipments by private utilities and traders shipped on Capesize vessels which contributed to the Baltic C9 and C10 indexes in the 2H-2021. In addition, state utilities preferred to employ smaller vessels due to their limited import quota periodically thus providing employment to Supramaxes, which was reflected in the Asia Baltic S8 (Indonesia to East Coast India) index in 2022.

Consequently, coal stock levels at thermal power stations have improved from 23,000 tonnes/day on average in 2021 to 26,000 tonnes/day on average in 2022 and are now hovering at the desired level of a little less than 35,000 tonnes/day on average so far in 2023.

In the short term, coal is expected to continue to dominate power generation in India, supporting imports growth before it softens from 2025 onwards when 1 Bln target in production is expected to be reached. In the long term, the Power Ministry estimates that the share of renewable energy generation would increase from the current 30% to 44%, while that of thermal energy (coal, gas, and diesel) is expected to reduce from the current 56% to 50% in India’s energy mix by 2030.

Steel - The steel market plays a pivotal role in industrialization. This sector has witnessed magnificent growth, resulting in India ranking as the 2nd largest crude steel producer in the world.

Data from the Joint Plant Committee of the Steel Ministry in the graph above, suggests that the steel production growth is bolstered by the double-digit annual growth of 18% in consumption, and elevated by increased Capex government spending in infrastructure spending. The automobile sector is a key driver of steel consumption in the country. In December 2022, India became the 3rd largest automobile market, surpassing Japan and Germany in terms of sales. Exports in 2022-23 remained moderated due to export duty levied to enhance domestic availability.

In the future, the government’s thrust toward infrastructure projects, construction, and real estate activity, and healthy demand from the automobile sector augur well for domestic steel demand. Exports, however, are expected to remain subdued because of the global economic slowdown, particularly in Europe and China.

An increase in steel production has already changed the iron ore dynamics in India. Iron exports of India have been declining from 68 mln mt in 2020 to 45 mln mt in 2022, whereas imports increased from 18 mln mt to 33 mln mt over the same period, shows AXS data. Iron ore loading in India has been shifted to supra-sized from a typical baby Cape designating limited exports while more Cape vessels are employed for imports indicating higher demand for iron ore.

Cement - India is the world’s second-largest cement producer, accounting for over 7% of the global installed capacity.

The industry data in the graph above suggests that demand for cement accelerated in the 2021-22 fiscal year, when construction activities gained momentum. As per the Union Budget 2022-23, there was a higher allocation for infrastructure to the tune of USD 26.74 billion in roads, USD 18.84 billion in railways, and USD 6.44 billion in housing which are likely to boost demand for cement and steel for construction. Cement has traditionally not been among India’s major traded products. However, India has been emerging as an exporter to the neighboring nations to the tune of 4 mln mt annually due to increasing production, AXS data show.

Future Outlook:

India's dependency on imports to meet its energy needs is slated to only grow as domestic production couldn't keep up with the consumption growth at a time when the country is being projected as the fastest-growing economy. The uncertainty, however, looms as its major trading partners, China (trade deficit) and the USA (trade surplus) face significant headwinds down the road. The USA is experiencing a technical recession and China’s reopening boost had failed to stimulate genuine recovery.

Given the uncertain international backdrop, the government of India is pushing for local manufacturing (through the “Make in India” initiative), taking advantage of its young workforce. Last month, India replaced China as the world's most populace nation. but what is worrisome is that the country would need more investment in education and economic reforms to fight youth unemployment. Creating enough jobs in India’s burgeoning population will remain a key challenge for the government. Hence, while India’s ascent looked inevitable, it is not a given that it can immediately fill the huge shoes that China played in the dry bulk market over the past 2 decades.