Reeling from weak coal, BDI is more dependent on China iron ore imports than ever

16 November 2017, Global – The Baltic Dry Index (BDI) has fallen 5% in the past week as ship chartering activity fell and freight rates weakened across all vessel segments. The Panamax market was the hardest hit, with the Panamax index down 11% w/w, followed by the 9% w/w correction in the Supramax index. This was mainly driven by weak coal shipping demand from China and other countries that would have been even more acutely felt had it not been for India’s increased coal demand.

Although the global dry bulk shipping orderbook-to-fleet ratio has fallen to 8.2% and the industry capacity growth looks moderate in the next 3 years, the BDI is now more dependent than ever on China iron ore imports which constitutes 72% of all global seaborne iron ore imports as no country in the world can possibly take up the slack. This will drive the Asian dry bulk shipping stocks lower and they have historically been positively correlated with the BDI.

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)

Chart: Baltic Dry Index fell 5% w/w although still 32% higher y/y

Chart: Baltic Dry Index fell 5% w/w although still 32% higher y/y

WEAK COAL SHIPPING DEMAND FROM CHINA AND ELSEWHERE WAS ONLY PARTIALLY OFFSET BY STRONGER DEMAND FROM INDIA

The Baltic Exchange Panamax Index (BPI) fell 11% in the past week due to weaker demand. The number of Panamax vessels chartered in the spot market fell 17% w/w and was 21% lower y/y. China accounted for only 9% of the Panamax vessels chartered in the spot market during the week. 32% of these vessels were chartered to carry cargo to Japan or Singapore-Japan, 30% to India, 16% to Europe and the remaining 13% to other countries.

India is the world’s second largest seaborne thermal coal importer after China, accounting for 16% of the global seaborne coal imports versus China’s 18%. Japan takes the number 3 spot, driving 15% of the global seaborne thermal coal import demand.

After falling 22% y/y between January and late October 2017, India’s coal imports have revived lately. In the past 3 weeks, 2.5 million tonnes of coal were imported per week. This is 27% higher than the same period last year and 56% higher than the weekly average level of imports year-to-date.

However, the pick-up in India’s coal imports has not been sufficient to offset the weaker coal import demand from China and other countries so far. India will have to step up its coal imports more significantly, in order to support the coal shipping freight rates.

Australia remains the dominant cargo source. 32% of the Panamax vessels were chartered to load cargo from Australia, 18% from South America and the remaining 50% from other countries. 

Chart: Baltic Exchange Panamax Index (2016 to 2017)

Chart: Baltic Exchange Panamax Index (2016 to 2017)

 

Chart: Seaborne thermal coal importing countries (2016)

Chart: Seaborne thermal coal importing countries (2016)

Chart: India’s coal imports (2016 to 2017)

Chart: India’s coal imports (2016 to 2017)

 

Chart: China’s coal imports (2016 to 2017)

Chart: China’s coal imports (2016 to 2017)

 

THE CAPESIZE MARKET HAS HELD UP BETTER THAN THE OTHER VESSEL SEGMENTS IN THE PAST WEEK BUT THIS COULD CHANGE IF CHINA’S IRON ORE IMPORT DEMAND FALTERS

The Capesize market has held up better than the other vessel segments in the past week, with the Baltic Exchange Capesize Index (BCI) down only 2% w/w.

Even then, chartering activity has slowed in the Capesize spot market. Fewer Capesize vessels were chartered during the week, down 8% w/w and 29% lower y/y. 78% of the Capesizes were chartered to carry iron ore, 8% were chartered to carry coal and the remaining 14% others.

Interestingly, more cargo will be loaded from South America while Australia is losing market share – only 28% of the Capesizes will load from Australia. 19% will load from Brazil, 8% from Canada, 6% from Colombia and the remaining 39% from other countries.  

Although China’s shipping demand was still dominant in the Capesize segment, its share of the total vessels chartered has fallen. 64% of these vessels will carry cargo to China, 11% to Japan/Singapore-Japan, 8% to Korea and the remaining 17% to other countries.

Unlike the coal shipping market, no country’s iron ore imports are anywhere close to China’s levels. China is the most important driver of iron ore shipping demand, accounting for 72% of the global seaborne iron ore imports. Japan, which drives 9% of global seaborne iron ore demand, and Europe, which drives 8%, are the distant 2nd and 3rd largest seaborne iron ore importers in the world.

As such, if China’s iron ore import demand falters, no country in the world will be able to take up the slack.

Chart: Baltic Exchange Capesize Index (2016 to 2017)

Chart: Baltic Exchange Capesize Index (2016 to 2017)

Chart: Global seaborne iron ore importing countries (2016)

Chart: Global seaborne iron ore importing countries (2016)

CHINA’S RESTOCKING OF IRON ORE COULD SLOW

This is a key risk near term as China’s restocking of iron ore could slow given the record high iron ore inventory levels at the ports in China. China’s iron ore inventory levels at the ports have reached 138 million tons as at 10th November 2017, up 25% y/y. We see limited upside to further restocking near term, especially if buyers expect iron ore prices to fall further as iron ore output levels increase in Australia and Brazil.

In addition, market expectations of lower iron ore prices in the coming months could dampen iron ore shipping demand as more buyers are likely to wait and import iron ore at lower spot market prices. There has historically been a significant positive correlation between the Baltic Dry Index and the iron ore price in the spot market.

Fundamentally, rising (falling) iron ore import demand tends to raise (reduce) iron ore spot prices and dry bulk shipping freight rates. In addition, market expectations of the future rise (fall) in iron ore prices also tend to drive increasing (decreasing) and sometimes speculative iron ore import volumes and consequently rising (falling) dry bulk shipping freight rates.

Chart: Iron ore inventory levels at China’s ports (2003 to 2017)

Chart: Iron ore inventory levels at China’s ports (2003 to 2017)

Chart: Baltic Dry Index (BDI) versus Iron ore spot price (US$/ton)

Chart: Baltic Dry Index (BDI) versus Iron ore spot price (US$/ton)

 

GLOBAL DRY BULK SHIPPING SUPPLY GROWTH LOOKS MODERATE IN THE NEXT THREE YEARS SO THE RISK IS MORE ON THE DEMAND SIDE

We forecast the global dry bulk shipping demand to grow 4.4% this year, ahead of our projected industry capacity growth of 3.7%. In 2018 and 2019, we expect the industry capacity growth to moderate further to 2.9% and 2.8% in 2018 and 2019 respectively. This should support a favourable freight rate environment if global dry bulk shipping demand holds up. We forecast the global dry bulk shipping demand to moderate to 3.5% and 3.0% in 2018 and 2019 respectively.

The key risk is if China’s iron ore and coal shipping demand weaken further. It could cause the BDI to capitulate as no other country in the world can possibly take up the slack, particularly for iron ore shipping. Moreover, the dry bulk shipping sector has the lowest barriers to entry among the various shipping segments and fairly short vessel construction lead times. A strong rebound in freight rates could revive rapid newbuild vessel ordering again and cap their long-term upside.

Chart: Global dry bulk shipping sector orderbook-to-fleet ratio (2007 to 2017)

Chart: Global dry bulk shipping sector orderbook-to-fleet ratio (2007 to 2017)

Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)

Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)

 

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