New Tariffs Signal a Period of Disrupted Dry Bulk Trade Flows
The dry bulk sector will likely face a period of disrupted trade flows amid a mounting number of tariffs, with the forward-looking cargo order volumes likely to provide early indications of the changes in the coming weeks. Higher costs and lower growth are likely to weigh on global dry bulk cargo order volumes, with seaborne exports of Brazilian steel to the US among the trades to come under pressure. Still, China has yet to impose tariffs on US grains and oilseeds, but recent demand has been lower than during the same period a year ago.
New Tariffs Signal a Period of Disrupted Dry Bulk Trade Flows
The global economy looks set for another round of tariffs and countermeasures as the US prepares to adopt blanket levies of 25 per cent on all aluminium and steel imports. This move follows the postponed plans to impose tariffs on all imports from Canada and Mexico and a new ten per cent levy for shipments from China. The latest developments will further disrupt and complicate global trade, especially as the countries affected will most likely impose new tariffs on US goods. Any countermeasures are expected to cause further US ire and lead to yet another round of new tariffs.
The response to the new tariffs is likely to vary in different parts of the world. While China saw fit to target US LNG shipments, such a move is unlikely to be a realistic option in Europe as the continent faces tight natural gas supplies. Hence, many policymakers will experience the balancing act of sending strong signals through counter-tariffs while attempting to limit the negative impacts on their domestic economies.
Two factors will, broadly speaking, decide how mounting trade disruptions and higher costs will affect shipping and the global economy. The tariffs are likely to weigh on demand for the affected goods and overall demand amid pressure on global growth. Additionally, exporters will attempt to find alternative markets for their output as tariffs reduce their competitiveness in their traditional markets. Still, the latter may prove difficult in the current economic climate, especially for steel.
Lower US Steel Imports to Weigh on Spot Demand for Shipments from Brazil
The two largest sources of imported steel in the US are Canada and Mexico. Hence, a decline in US demand for Canadian and Mexican steel would not immediately affect freight rates for seaborne transportation. However, unless outputs are kept domestically or shrink, any attempts to find alternative markets for Canadian and Mexican steel would involve sea transportation, supporting freight demand.
Conversely, a decline in US imports of Brazilian steel would directly impact cargo order volumes in the dry bulk spot market and affect freight rates. While the measures are due to take effect in a month’s time, the time between cargo ordering and discharge in the destination ports suggests that demand will come under pressure fairly quickly. However, the dry bulk spot market would experience less impact from lower US imports of Chinese steel as other shipping sectors and long-term contracts dominate this part of the trade.
Cargo order volumes for US steel imports have fluctuated in recent weeks, possibly because buyers have anticipated the latest set of tariffs. However, despite recent spikes in weekly demand, cargo order volumes for Brazilian steel exports to the US in January were 21 per cent lower than during the same period in 2024. The decline in demand last month was not an isolated development, with November and December seeing even larger year-on-year drops. Still, the Brazilian share of the trade has been relatively stable at just below 50 per cent in recent months.
The supramaxes dominate the Brazilian steel trade with the US. Hence, a decline in demand from US buyers would weigh on supramax freight rates in the Atlantic. On the other hand, there could be some offset if the Brazilian steelmills find alternative markets elsewhere. In contrast, the handysizes tend to be the tonnage of choice for US steel imports from the Far East. As a result, given the distances involved, tonne-mile demand for the smallest vessels may come under some pressure.
While it is relatively straightforward to highlight the immediate effects of lower US demand for overseas steel, the long-term effects are likely to be more complex. The question of substitutes, both for markets and products, will take some time to settle. In the short term, can the US produce sufficient quantities of the steel products the country needs? In the longer term, how quickly, if at all, can producers outside the US find alternative markets? Furthermore, there will likely be more US and non-US tariffs in the near future, providing additional complexity for global trade.
Less Chinese Steel Bound for the US Could Fuel Higher Spot Freight Demand
As highlighted above, Chinese steel exports to the US are typically not served to a great extent by the dry bulk spot market but by other arrangements. However, should US demand for Chinese steel decline, cargo order volumes in the spot market may rise as steel mills look to other destinations for their produce.
Cargo ordering activities for Chinese dry bulk exports during the past month were marginally higher than during the same period last year and significantly higher than in 2023. Among the contributing factors to the robust demand for seaborne transportation of Chinese exports was a slight increase in cargo order volumes for steel loading in the country’s ports compared to January last year. While demand for seaborne transportation of Chinese steel exports declined by sixteen per cent between December and January, last month’s aggregate was three per cent higher than a year ago, possibly helped by the different timing of the Lunar New Year.
Still, the past two and a half weeks have been soft for Chinese seaborne steel exports as the Lunar New Year has weighed on cargo ordering activities. The past week saw a limited rebound in demand, but the aggregate fell well short of the volumes recorded during the year’s first three weeks.
After trending lower since October, Chinese steel rebar prices staged a limited rebound in mid-January. However, since then, prices have faced limited headwinds. The March rebar futures listed on the Shanghai Futures Exchange ended last week broadly in line with the level recorded at the end of last year but around ten per cent below the highs recorded in early October.
Mounting pessimism over the outlook for construction activities amid muted spending by local governments has contributed to the resurgent headwinds for rebar futures. Hence, the subdued Chinese rebar prices suggest that cargo ordering activities for the country’s steel exports will recover in the coming weeks. However, in an increasingly protectionistic world, the overseas market for Chinese steel may come under pressure.
The latest US tariffs on Chinese imports may also contribute to lower growth in the world’s second-largest economy, putting pressure on Chinese domestic steel demand. Hence, Chinese steel producers may see the need to reduce output, which could reduce steel export volumes and, by extension, iron ore imports.
US Grains and Oilseeds Becoming Targets for Countermeasures?
The news that the Chinese government excluded imports of agricultural commodities from its retaliatory measures to the ten per cent blanket tariffs on its exports to the US supported grains and oilseeds prices last week. However, since then, the new US administration has announced the tariffs on steel and aluminium. Hence, the respite may prove temporary as Beijing considers further countermeasures. Still, the omission of grains and oilseeds could be an opening for any trade negotiations, with future Chinese purchases potentially seen as a sign of goodwill. However, as the Australian coal miners experienced some time ago, official measures are not necessary for disruptions in the trade with China.
Cargo order volumes for US agricultural commodities due for discharge in Chinese ports have not exhibited the same brief January rebound as in recent years. Over the past month, aggregate demand was around 75 per cent lower than during the same period in 2023 and 2024. Hence, the coming months will see lower volumes of US grains and oilseeds discharged in China than in recent years, especially as the current month has seen a slow start to cargo ordering activities.
Monthly demand for seaborne transportation of US grains and soybeans has been on a steady downward trend since August. While the trade is seasonal, with limited activities during the second quarter, volumes during last year’s fourth quarter were significantly lower than in 2023. Hence, there is an upside for Chinese buyers should the desire to show goodwill versus the US increase.
On the other hand, should Beijing decide that the US grains and oilseeds are legitimate targets for tariffs, there is significant room in the trade with South America. Chinese cargo order activities for agricultural commodities loading the east coast of South America have had a relatively soft start to the year. As a result, any Chinese tariffs on US grains and oilseeds would support the demand for seaborne transportation in the coming months. However, demand would suffer during the year's second half as US farmers would ship less of their crops to China.
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