Mixed short term outlook for dry bulk as the steel industry adjusts to reality

The dry bulk market has been remarkably solid in recent months with a strong recovery in freight rates since the mid-summer drought. This has taken place despite adjustments in a steel market where production has outpaced demand for several months. During the first nine months of this year, world steel production was 6.3% higher than in the corresponding period last year. At the same time, the International Iron and Steel Institute now foresees a global steel demand increase of just 2.7% in 2007, up 10.3% for China and down 0.2% for the rest of the World.
Steel stocks have increased and prices fallen back. In sharp contrast, raw material prices are locked in at very high prices, resulting in severe losses for many steel producers. After self-imposed steel production cut-backs in several countries, Chinese authorities in late October announced a 4th quarter cut of 10 million tons in the country’s production of certain steel products. That corresponds to more than 15 million tons of foreign iron ore.
China’s iron ore imports slipped from 68.0 million tons in 2Q to 67.6 million tons in 3Q. During the first nine months of the year, China’s iron ore imports were up almost 32% from the corresponding period last year. Japan saw iron ore imports fall back from 33.9 million tons in 2Q to 31.5 million tons in 3Q, which was down as much as 9% from the same quarter last year. Year-to-date iron ore imports to Japan over nine months were down 1.6% from last year.
A closer look at the most recent developments shows that the 12-month change in China’s pig iron production dropped from a peak of about 41% in June and July to below 24% in September. The rest of the world has seen a drop in the
12-month change from a growth of over 10% in September last year to a decrease of about 5% during the last couple of months. In 2005, China accounted for 35% of all pig iron production in the world. According to figures from the International Iron and Steel Institute (IISI), this share has now increased to 43%.
China’s steel exports decreased strongly in recent months, whereas imports have turned upwards again. The country has again become a substantial net importer of steel. Such a development is clearly positive for the dry bulk market. However, lower steel exports also reflect the present low demand for steel outside China. Bearing in mind that the steel industry accounts for as much as about half of the total volume entering seaborne dry bulk seaborne trade, the present manoeuvres to adjust the steel market to get rid of the steel glut and defend the falling steel prices must necessarily have some temporarily dampening impact on dry bulk tonnage demand.
Against this background it is startling to observe the solid recovery of the dry bulk market this autumn. Since the market bottom in early August, the Baltic Dry Index is up 78%, the Baltic Capesize index has practically doubled, and present freight rates are more than decent.
Looking ahead, the IISI is more optimistic about the global steel consumption next year, forecasting a global growth of 4.0–5.5%in 2006, with growth in China slowing somewhat to 7–10%, whereas the rest of the world could see a solid increase to 3–3.5% growth next year.
In Fearnresearch’s latest Dry Bulk Market Quarterly, dry bulk ton-miles are expected to increase 5.1% this year and 3.9% next year. One quarter ago the same forecasts were 4.3% and 4.1%, respectively.
On the fleet side, new bulk carrier orders fell back from 4.1 mdwt in 2Q to 2.8 mdwt in 3Q, followed by 1.4 mdwt in October. Over the first 10 months of 2005, new bulk carrier orders totalled 15 mdwt, against 24 mdwt in same period last year. Demolition sales of bulk carriers have been almost non-existent this year, with less than 0.5 mdwt sold over ten months. The latest fleet forecasts from Fearnresearch show that dry bulk fleet is estimated to increase almost 7% in 2005, before almost 5% in 2006 and modest 3.3% in 2007, which could create another window of opportunity in the dry bulk market.
Timecharter rates and second-hand prices are expected to remain rather stable through 4Q05, before a general softening through next year of around 10–15%, albeit timecharter rates are expected to recover somewhat in late 2006, ahead of a slower fleet growth and
a potential upturn in business cycles.
Newbuilding prices are expected to show a steady decline of around 10% from now through 2006. This development is due to strong fleet growth, strongly increased yard capacity, high order books for container vessels and several other vessel types, and also to softer steel prices.
Jarle Hammer, 30.10.05

Date: 08 February 2008