Can a rise in steel production in China spark life into the dry bulk sector?
There is little doubt that China’s become the world’s blast furnace, pouring out steel at historic rates. With the ink hardly dry on a $157 billion stimulus package to rebuild the PRC’s infrastructure, there is some cause for optimism in the dry bulk sector as nothing fills bottoms quite like steelmaking.
By George Lauriat, AJOT It doesn’t matter how you view the charts, daily, monthly, yearly or even further back, the BDI (Baltic Dry Index) which measures the performance of dry bulk shipping has been moribund to the point that a flounder bumping along the bottom looking for a meal is higher in the water column.
Over the last year (52-weeks) the BDI has been as high as 1,930 and as low as 647 (at this writing it is a touch over 965). For comparison, those who can remember the days before the great recession, in May of 2008 the BDI topped 11,620. In May of this year the BDI approached 1,150, or over 10,000 points lower than the pre-recession highs. Like other sectors, there are too many ships, chasing too few cargos. Additions have come faster than deletions, all adding up to a bumpy ride along the bottom.
China: Blast Furnace To The World
The key to recovery for the dry cargo sector is steel production. Steel and steel producing commodities and products are the largest employer of dry bulk ships, accounting for nearly half of the dry bulk tonnage. The ocean borne transport of coal and iron ore for the furnaces, scrap steel and eventually steel products, eats up ton-miles and lifts the dry cargo sector.
It has been often written that China’s the world’s workshop, but in reality the Middle Kingdom is the blast furnace to the world. China is easily the world’s largest producer of crude steel. In 2011, China produced nearly 684 million tonnes of crude steel up around 7% over 2010.
To put this total in perspective, it would take the EU (27) and the next eight producers to equal China’s production (Japan is second 107.6 MT, and the US 86.4 MT is next).
The shift of steelmaking to China is a fairly recent economic phenomenon. In 2001, China’s steel production accounted for just under 18% of the world total with the EU (27) taking a 22% slice and Japan a little over 12% of the steel production. By 2011, China accounted for over 45%, the EU (27) just under 12% and Japan 7% of the world’s crude steel production. According to figures released this month by the US Department of Commerce China’s share of crude steel making is steel rising and now stands at 47%.
The rapid rise of the steel sector in China was based on urbanization, and double digit GDP growth fueled by exports. Recently the economy is set to grow at between 7.5%-7.7%, far below the rates that fired the rapid growth in steel production. Nevertheless, production has continued to rise which has promoted concerns that the growth is unsustainable or at least economically unviable leading to the question of dumping on steel exports. In many cases the steel mills are outdated, but easy access to capital and local interest is keeping employment up. Tax revenues flowing creates another dynamic.
In September, the PRC announced a massive $157 billion infrastructure program that includes the construction of 25 new subway lines, 13 new highway projects and a number of other large-scale transportation related projects, urban-rail initiatives, energy production and waste-water treatment plants. The stimulus plan, along with the goal of doubling the per capita GDP by 2020, will increase steel demand in China.
King Coal and the princelings
To produce these vast quantities of steel, China imports more steelmaking raw materials than any other nation. It’s a little hard to believe that up until 2009, China was a net exporter of coal. But three developments changed China from being an exporter to an importer in a very short period of time: the rapid increase in domestic steel production, the huge increase in electric demand and the closing of many smaller inefficient mines.
In 2011, China imported around 182 MT of coal, up nearly 11% over 2010 despite the slowing economy. China’s total coal imports exceeded those of Japan, making it the world’s largest importer of the black rock. Most of China’s coal comes from Indonesia or Australia, although the US is also a major player. In 2011, electric generation for steelmaking was up 11.4% over 2010 and is likely to post a similar increase this year.
In 2011, China imported 687 MT of iron ore. Most of the exported iron ore is sourced from three countries, Australia, Brazil and India. In 2011, Australia shipped 466 MT up 9% while Brazil exported 331 MT up 6%. India exports of iron in 2011 were only 79 MT but this was sustainably off the previous year, when they shipped over 100 MT.
India’s exports are likely to fall even more this year. In March, India suspended all exports from the eastern state of Orissa, which follows a mining ban in the state of Goa, another key producing region. Brazil’s exports to China are also expected to increase slowly for a variety of domestic reasons, which could lead to Australian shipments topping 500 MT next year.
China imports a considerable amount of ferrous scrap for their mills. In 2011, China imported nearly 7 MT an increase of 16% over 2010. Both South Korea and Turkey (21.5 MT) import considerably more, but imports of scrap metal are running ahead of steel production increases. It’s anticipated that China’s ferrous scrap metal imports could rapidly hit 10 MT and move the country into second place behind Turkey.
China is also the largest exporter of steel and steel products. In 2011, the PRC (People’s Republic of China) exported nearly 48 MT of steel product. Through the first half of the year, China is estimated to have exported 25 MT of steel products, up 12% over 2010. Only South Korea and the USA at 14% apiece showed more growth. Coincidentally, South Korea accounted for almost 21% of China’s steel exports. The US was 12th in volume at 2.4% market share.
The problem with China’s steel exports is the speed of which they flooded the markets. In 2010 China’s steel exports rose 79% while steel imports dropped 24%. Last year was a repeat with exports up 15% and imports off another 5%. And nothing has changed this year. In 2012 China’s steel exports are up 10.2% through the first nine months compared to 2011 and imports down 12%. Through three-quarters China has exported around 41 MT and imported 10.5 MT. Most of China’s exports are to Asian nations, but as the economies slow, as is the case in South Korea, China steel migrates to other markets like the EU and the US.
It appears that China’s steelmakers are gearing up for the stimulus package, but it’s difficult for foreign trade partners not to be a little wary should the proposed infrastructure building slow and a surplus of steel products begin to pile up.