The Dry Bulk Weekly Review in Shipfix Data
Last week’s dual releases of PMI data for the Chinese manufacturing sector indicated that the world’s second-largest economy will continue to face headwinds, especially as there are suggestions that the country’s growth engine, exports, may splutter. While Shipfix’s forward-looking cargo order volumes for Chinese dry bulk imports currently reflect seasonal weakness, demand over the past two months is considerably lower than a year ago. While Shipfix’s data set signals continued robust Chinese steel exports, it is nevertheless a sign that domestic demand remains weak.
Cargo Order Volumes Indicate Declining Chinese Dry Bulk Imports
The weaker-than-expected PMI data for the Chinese manufacturing sector, published last week, highlighted the challenges facing the world’s second-largest economy. Both the official and the alternative Caixin Purchasing Managers’ Indices for the country’s manufacturing sector were in contraction territory. Given the different setup for the alternative PMI, the unexpected drop into contraction territory is probably quite problematic for the Chinese leadership as it indicates that the country’s exports are now facing headwinds.
The country’s export-oriented manufacturing sector has more than offset the sluggish domestic demand situation, which has arisen from problems in the country’s property sector and disinflationary pressures. Hence, any suggestions of weaker exports will raise warning signals that the official growth target of five per cent may drift out of reach.
Even if the year’s growth target is eventually attained, an economic expansion of around five per cent for the world’s second-largest economy remains modest compared to the rates seen in the past. While it was always inconceivable that the Chinese economy could maintain exceptional growth as it developed and matured, much of the recent headwinds are due to the ongoing problems in the country’s real estate sector and sluggish domestic demand growth.
Following the release of weak US labour data on Friday, the US dollar has come under significant pressure amid mounting fears that the world’s largest economy may not achieve a soft landing and may drift into a recession instead. The depreciation of the greenback could make commodities cheaper for Chinese buyers and fuel an uptick in demand. Still, recent developments in order volumes for dry bulk cargoes discharging in Chinese ports indicate that the country’s appetite for overseas dry bulk commodities has been weakening. Hence, any increase due to a weak dollar starts from a low base.
Weekly cargo order volumes for dry bulk commodities due for discharge in Chinese ports have steadily declined since the beginning of May. While the data excludes shipments covered by longer-term agreements, the spot market data show weakness compared to the same period last year. The aggregate for July was more than thirty per cent lower than a year ago, while June recorded a nine per cent year-on-year decline. Hence, the forward-looking nature of the cargo order data suggests that the Chinese economy will continue to face headwinds.
Headwinds for Chinese Seaborne Coal Imports
Rising headwinds for the Chinese economy are likely to affect the seaborne flow of commodities to the country’s ports. While new stimulus packages for the economy could fuel demand for raw materials such as iron ore, base metals and coal, recent developments suggest that the Chinese leadership is reluctant to embark on massive spending programmes. In any case, the efforts to stimulate economic expansion since China emerged from its draconian COVID-19 control measures have failed to deliver anything near the growth rates of yesteryears.
Currently, Chinese seaborne coal imports are affected by several structural issues, such as the increase in electricity production by hydropower and the rise in imports from Mongolia. The economic headwinds will add additional pressure on the volumes passing through the country’s ports. After a robust start to the year, with total seaborne volumes of coal bound for China in line with the aggregate for the same period last year, according to Oceanbolt data, the past two months have seen a considerable shift.
Weekly cargo order volumes have been trending lower since May, with shipments from Indonesia taking the brunt of the declining demand. The past two months have seen demand drop by around 40 per cent compared to last year. In addition, unlike this year, cargo order volumes trended higher throughout June and July last year. Hence, the coming months look set to see Chinese coal imports retreat from the levels recorded in recent months.
Chinese Steel Exports Look Set to Remain High
Iron ore prices have oscillated around the symbolic 100-dollar level over the past two weeks, while Chinese steel rebar prices retreated to their lowest in over four years. The depressed price levels are the result of concerns over the outlook for the Chinese economy, as continued problems in the country’s real estate market weigh on domestic demand.
One implication of the sluggish domestic demand is that the Chinese steel mills are finding it increasingly difficult to offload their output to buyers in the country. Instead, the Chinese steel producers have turned to customers overseas. The increasing Chinese steel exports over the past year have generated trade tensions, as officials in some countries perceive that the Chinese exporters are engaging in dumping. As a result, the issue of tariffs has become an increasingly popular subject of discussion. Hence, the current engine for Chinese growth, exports, could face headwinds should trade frictions increase, translating into further problems for the world’s second-largest economy.
However, if Chinese officials are concerned that extensive steel exports will affect the country’s foreign trade, there is precious little proof that any immediate remedial action is being taken. The demand for seaborne transportation has rebounded after a brief decline in weekly cargo order volumes for steel loading in China in early May. While cargo order volumes were sixteen per cent below the average for the past two months last week, the aggregate for July remained in line with the 6.9 million tonnes recorded over the past five months. Hence, in the coming months, considerable amounts of Chinese steel will be discharged around the world, potentially stoking more demand for import tariffs.
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