Capesize Market - The Outlook
At this month’s G7 meeting held in the ancient Japanese city of Hiroshima, US President, Joe Biden said that “G7 countries will look to diversify their supply chains away from China as part of a united approach that aims to reduce their dependence on one country.” The G7 as a whole said it wanted to de-risk their relationship with China, not de-couple from it. If only the capesize market had that option however. Since the turn of the millennium the market’s dependence on one country has continued to grow to a point where its fortunes are inextricably reliant and, therefore with the durability of the Chinese economic recovery now being questioned, it is inevitable that confidence in market resilience in the short to medium term is being severely tested.
Stronger than expected commodity flows in the opening four months of the year seemingly belie the fragility of the Chinese economy. The dichotomy is that, whilst iron ore imports are nearly 9% higher on the year to date with coking coal receipts some 89% up on this time last year, steel demand is weak and manufacturers are being encouraged to trim their production volumes to prevent over production in the second half of the year. Falling demand means Chinese steel rebar prices are the lowest since April 2020 in, what is traditionally, peak construction season and with government figures showing new construction starts between January and April some 21% lower than this time last year the scale of the concern becomes clear.
Rumours of a large-scale government stimulus package for the steel and construction industry have recently gained traction, however no official announcements have been made and, whilst such an influx of money would be hugely beneficial, not least for the capesize sector, the longerterm consequences of pouring more money into an already debt laden sector would be hard to ignore. Elsewhere China’s problems are mounting and unless the economy can be sparked into life, and that means industrial growth in addition to consumer spending, confidence will wane and inward investment will continue to fall as foreign companies choose to locate to other, more favourable locations such as Vietnam.
Away from the steel and construction sector, the capesize market has undoubtedly benefitted from the upswing in thermal coal imports into both China and India during the opening months of the year. In an attempt to pre-empt energy shortages, both countries put in place mechanisms to boost domestic production and also better manage coal imports to avoid a repeat of recent coal supply tightness. China’s domestic coal production is up 6% on the year and India’s 11% whilst thermal coal imports have surged 81% and 25% respectively. The increase in shipments is, of course, positive news for the market, however, with stockpiles now at comfortable levels ahead of the peak summer demand season, these volumes should fall and will see lower import levels in the months to come.
With global economic recovery in a fragile state, the importance of US and Chinese economic stability and tangible industrial growth cannot be overstated. Rumours of targeted financial support for the construction industry in China persist and, without it, any meaningful and sustained recovery looks unlikely in the short term. The major positive for the dry bulk market and capesize sector in particular however, remains the historically low fleet growth figures and new maritime carbon emission regulations, which will both restrict the supply of tonnage to the market in the longer term.
Data source: Gibson Shipbrokers