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China and India Lead the Dry Bulk Market’s Rebound by increasing iron ore and coal imports

A lot  has been said regarding the dry bulk market’s rebound and future potential, however, much will come down to China’s and India’s dry bulk commodities’ demand growth, most notably iron ore and coal.

  In China, shipbroker Banchero Costa recently said that “Chinese steel production has proved surprisingly resilient this year, as the government pushed forward more infrastructure and construction investment to compensate for the negative effects on jobs and growth that the trade war is having on the manufacturing sector. China’s crude steel output hit a record high of 89.09 million tons in May, up from 85.03 million tons in April and 81.13 million tons in May a year ago, according to data from the National Bureau of Statistics, even as a jump in prices of raw materials, particularly iron ore, cut into mills’ profit margins”.

“However, in the first five months of 2019, China imported just 423.92 million tons of iron ore, which was down 5.2 per cent on the same period in 2018, according to customs data. The figure for May, this year was 83.75 million tons, up by 3.7per cent month-on-month from April but down 11 per cent year-on-year from May 2018.

 Spot iron ore prices, the highest levels in more than five years

Unfortunately for the shipping industry, this is almost entirely due to iron ore supply constraints in Brazil, and to a smaller extent in Australia, and the skyrocketing price of this commodity. Spot iron ore prices have jumped to the highest levels in more than five years, with benchmark 62 per cent fines for delivery to China at 117 US Dollars a ton at the end of June, according to sources.

Iron ore inventories at China’s 45 major ports have fallen to 116.75 million tons at the end of June, down 21 percent from a recent peak in March, and the lowest level since the start of 2017. Steel mills are also starting to prefer lower grade iron ore.

If iron ore rallies, likely Chinese mills switch to lower grade ore

If iron ore continues to rally, or even remain at elevated prices, it’s likely more Chinese mills will be tempted to switch to lower grade ore, which will benefit Australian exporters, but also provide some lifeline to the moribund domestic Chinese mining sector.

Domestic iron ore mines are producing more iron ore, while mills have also sharply increased the use of scrap in the converter burden to cut back on iron ore usage, according to the China Iron and Steel Association.

Meanwhile, in a separate dry bulk trade, i.e. Indian coal imports, Banchero Costa said that “during the first quarter of 2019 the most dynamic and fastest growing major commodity was coal which grew an estimated 7 per cent compared to the first quarter of 2018.

India recorded two digits growth in coal import in FQ of 2019 

Whilst Coal imports into China and Japan the first and third largest importers were slightly lower during the first quarter of 2019 compared to same period of 2018, there was a very large number of countries where imports recorded two digits growth (in a few cases three digits growth); to name the largest India, Taiwan, Malaysia, Thailand, Vietnam, Pakistan, Bangladesh”.

According to the shipbroker, “it is clear that with the economic development, the Indian Subcontinent and South East Asia are quickly becoming the new sources of demand for the coal trade. The single largest driver was India with imports that increased 14 per cent (1Q18 vs. 1Q19) to over 56 million tons.

India is set to rival China again as the largest importer of coal in 2019, a record briefly detained in 2015 and 2016. Where is India sourcing all this additional coal? SE Asia (i.e. Indonesia) exports to India only increased 2 per cent, whilst imports from North America, both from the Atlantic and Pacific basins increased 41 per cent and 35 per cent respectively; a lot more coal was also imported from Australia +12 per cent:

India importing more coal and also from further away

Not only India is importing a lot more coal, it is also importing it from further away. If we compare coal imports in the first quarter of 2017 and the first quarter of 2019, we can see that despite the trends just described above the share of imports by each vessel size did not change much with smaller size vessels like Supra Max sourcing 22 per cent (was 21 per cent in 2017) of coal, Pana Max 40 per cent (was 37 per cent) and Cape Size 29 per cent (was 28 per cent).

Indian imports offer demand growth for Supra Max, Pana Max and Cape Size

One would believe that importing a lot more and from further away the vessels’ choice would move to bigger units, but, mainly due to draft restrictions in Indian Ports, this is not the case for Indian imports that offer good demand growth both for Supra Max and Pana Max and also for Cape Size”, Banchero Costa concluded.

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