The dry bulk trades have been in the doldrums, as the BDI (Baltic Dry Index) seems destined to bump along the bottom bringing little relief to beleaguered ship-owners. China is the key to the dry bulk sector. If supply and demand are to come into balance, it will begin there. But when? For a long while, really since the crash in 2008, the dry bulk trades haven’t recovered. Back on June 2, 2008 the BDI [Baltic Dry Index] reached 11,577 before the global financial crisis drove it over a precipice. At this writing (November 10, 2014) the BDI is at 1,418, a great deal better than the December 1, 2008 tally of 677, but a number that reflects the structural problems with dry bulk shipping – too many ships and too few commodities. While seaborne freight has been annually increasing, the number of ships has outpaced demand and at least in the near term, the impasse is likely to continue. There is a strong link between the dry bulk trades and global GDP growth. When the global economy prospers, trade in various commodities like iron ore, coal, steel related products and agricultural goods also boom. Back in October the IMF [International Monetary Fund] revised downward the growth in world economies for 2014 to 3.3% (from 3.4%) and 3.8% (from 4%) in 2015. Although there are many contributors to the new scaled back GDP assessment, one of the main reasons is China’s economy is growing slower than the anticipated clip of 7.5% (estimates are that growth is between 7.1%-7.3%). The main reason the dry bulk trades now will find it difficult to rebound is that the growth in the global economy is slowing (albeit still trending upward) and commodity prices are falling. For the first nine months of 2014 commodity prices fell 8.3%, with metals falling 10%, a 9% drop in energy related commodities and agricultural commodities off 5%. While the drop is disturbing from a pricing perspective, most economists feel that the increase in commodity production more than falling demand, oil being a glaring example, is responsible for the pricing drop. In addition to the slowing of global GDP growth the stockpiling of commodities, in part due to falling prices, has also at least in the short-term dampened demand. The post-2015 forecasts anticipate GDP growth again picking up and commodity demand and world trade following suit. For this reason, and a relatively modest orderbook for bulk carriers, ship-owners are positioning themselves for the next upturn. Whether the next economic rebound will significantly lift the BDI is all together another question. China Steel Market It’s hard to overstate China’s contribution to the supply and demand equation for the dry bulk trades. China’s demand for iron ore and steel making commodities and exports of steel and steel related products are a major contributor to seaborne movements. For example, it’s forecast China will account for 28% of global seaborne steel products trade this year, compared to 21% in 2013. Even among the minor bulks such as logs, soybeans, wheat, fertilizers, bauxite and manganese ore, China accounts for 17% of the global trade. China’s the world’s largest importer of iron ore. The imports of iron ore are largely from Brazil and Australia. Over the first nine months this year, China imported 700 million tons, a 16.4% increase over 2013. Australia accounted for 406 million tons, up 100 million over 2014. Brazil exported 125 million tons of ore to China for the first nine months. As part of the process of propping up domestic industries, the Chinese began substituting domestically mined ore with a lower Fe content and combining it with high quality imported ore. Another determinant behind the iron ore surplus that sent iron prices tanking was major producers like Brazil’s Vale and Australia’s Rio Tinto Group increased output at the same period of time as the economies of China and others slowed. In September China’s exports of steel hit 8.4 million metric tons, the highest monthly figure ever recorded. Nearly 57% of China’s September steel exports went to other Asian countries with South Korea hitting 1.1 million tons and Vietnam 695,000 tons. The Americas collectively imported 1.1 million tons, African nations tallying 621,000 tons and the EU only 432,000 tons. This represents a shift away from traditional markets in North America and Europe. The key reason for China’s steel products export boom can be partly attributed to lower steel demand domestically. According to the CISA (China Iron and Steel Association) China’s steel consumption in the first eight months of 2014 declined y-o-y for the first time since 2000. Keeping the Coal Fires Burning But China has a checkered history as State sponsored goals often trip up economic policy. China is the world’s largest consumer of coal and in October the nation’s Finance Ministry announced it would reintroduce tariffs on low-grade coal imports, effective now. The tariffs on coking coal are 3%, briquettes at 5% and 6% on other coal. These are the maximum tariffs allowed under the agreement China signed to become a member of the WTO. China imports around 13% of its coal and has large reserves that in recent years have come online. Not surprisingly, China’s coal imports, including lignite, thermal and metallurgical coal, totaled 20.13 million tons in October, down 17.4% on year With more than 70% of the country’s mining enterprises unprofitable and domestic coal prices near historic lows, the new announcement appears to be an effort to buttress the ailing sector at the expense of imports. In August, China’s National Development and Reform Commission asked major power utilities to reduce coal imports for the remainder of the year in an effort to address an oversupplied domestic market and boost domestic coal prices. The tariffs will follow an announcement that next year China will ban the import of coal with 40% or more ash content or 3% or more sulfur content. The ban is aimed at lignite, which is the primary coal burned in power plants. The import coal ban is designed to help reduce air pollution in China but ironically the Chinese power plants may be exempt from the ban. Supply & Demand No doubt China is the key to the dry bulk sector but with the economic slowdown there is little overt evidence to suggest a quick rebound. Even with all the numbers suggesting a downturn, global commodity demand is still rising. The suggestion made by the IMF’s forecasts and those of other economists, is that in 2016, the growth track will begin to fall in line with the previous estimates. If so, global commodity demand should rise and most ship-owners would settle for returns similar to 2010.