The Dry Bulk Weekly Review in Shipfix Data
Over the past few weeks, several instances of weaker-than-expected Chinese data have pointed towards continued challenges for the world’s second-largest economy. While seasonal weakness may be a factor, Shipfix’s unique forward-looking data sets suggest that the world’s second-largest economy may continue to struggle in the coming months. Among other things, imports of copper during the early parts of the new year look set to fall below those observed during the same period in recent years.
Lower Cargo Ordering Activities for Chinese Steel Exports Suggest that the Country’s Mills Are Adjusting to a New Reality
In late December, China’s Metallurgical Industry Planning and Research Institute published its forecast for steel demand during the coming year. It expects that steel demand in the world’s second-largest economy will decline by 1.7 per cent during 2024, following a drop of 3.3 per cent last year. The continued headwinds for the country’s beleaguered property sector are weighing on the demand situation, with uncertainty among the country’s consumers unlikely to ease in the near term to improve the outlook for construction activities.
The weak domestic demand saw Chinese steel exports rise last year as excess supplies were shipped to overseas buyers. However, after a peak in November, cargo order volumes faced downward pressure as the end of the year approached. While it can be argued that the lower ordering activities are the result of seasonality, recent reports that Chinese crude steel production dropped to the lowest levels on record during the second half of December may suggest that the country’s steel mills are adjusting to a new reality with lower demand. Hence, cargo order volumes for Chinese steel products may struggle to recover, at least in the short term.
After some volatility, recent weeks have seen the average cargo sizes stabilising around 25,000 tonnes. Hence, any changes to Chinese steel exports will primarily affect the smaller vessel segments. However, as shipments to Southeast Asia have accounted for a large part of the trade, the overall effect of a decline in Chinese steel exports could be net-positive for tonne-mile demand as buyers may have to source alternatives from more distant shores.
Weak Demand for Seaborne Transportation of Copper to China Points towards Sluggish Economic Growth in the Coming Months
The new year has begun with copper retreating by around three per cent as a stronger dollar and concerns over the demand outlook have weighed on prices. Still, prices remain around seven per cent above the lows seen in early October but approximately ten per cent below last year’s high recorded in January. The bullish sentiments during the early parts of last year were driven by optimism over demand as China emerged from a period of Covid-related disruptions. However, as the expected strong Chinese economic rebound failed to materialise, the red metal endured a year of shifting fortunes.
After months of robust cargo ordering activities for copper discharging in Chinese ports, volumes took a nosedive in December. While some of the weakness can be attributed to seasonal factors, as the time lags involved Christmas in the loading areas and the Chinese New Year at the time of discharge, the monthly reading for December was the lowest for the month over the past three years.
Total cargo order volumes for copper bound for China retreated to 630,000 tonnes in December, following a month-on-month decline of nearly 40 per cent. The reading for the past month was also a third below the level recorded during the same month in 2022 and eleven per cent lower than in 2021. Hence, the numbers suggest that Chinese demand for the red metal is experiencing a soft patch, and, given its traditional bellwether status, could indicate that growth will continue to face resistance.
Chinese Reintroduction of Tariffs on Russian Coal to Add Further Pressure on Shipped Volumes
After an absence of more than one and a half years, China reintroduced tariffs on Russian coal imports at the beginning of the month. The levies were suspended in May 2022 to safeguard against supply disruptions in the wake of the Russian invasion of Ukraine. Since then, Russia has solidified its position as China’s second-largest supplier of the dirtiest of fossil fuels. However, rising domestic production has led to the reintroduction of the tariffs as Beijing seeks to protect the country’s miners against falling prices amid excessive supplies.
Unlike the Russian supplies, coal imports from Indonesia and Australia are exempt from tariffs amid bilateral free trade agreements. Hence, Chinese imports from its northern neighbour may face headwinds in the coming months unless the Russian miners lower their prices further.
Chinese imports of Russian coal over the past year are likely to have reached 100 million tonnes. However, after a peak in June, monthly import volumes trended lower throughout the remainder of the year as Russia’s price advantage came under pressure. Shipfix’s forward-looking cargo order data recorded robust volumes during the early parts of the year, correctly predicting the high imports during the second quarter.
Following a limited rebound during the third quarter, cargo order volumes for Russian coal bound for China trended lower during the year's final months. The development suggests that actual Chinese imports of Russian coal will continue to decline in the coming months. The weaker demand for seaborne transportation of Russian coal to Chinese ports has weighed heavily on ordering activities for cargoes from Russia’s Far East, with spot volumes dropping to 1.9 million tonnes in December. However, it has also led to a virtual collapse in demand for shipments from more distant Russian shores.
The weaker order volumes have affected all vessel segments negatively, with the effective disappearance of the longer voyages adding to the decline in tonne-mile demand. However, should the reintroduction of the tariffs lead to Chinese buyers sourcing more of their coal in Indonesia and Australia, the impact on freight rates is likely to be limited. However, if copper imports and steel exports are pointing towards continued challenges for the Chinese economy, the appetite for overseas coal may face headwinds in the coming months. As a result, freight rates may suffer.
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