Does the dry cargo world need to be worried about China?
When China unwound its zero-Covid restrictions earlier this year consumer behaviour and industrial activity began to normalise — but its economic recovery has been grindingly slow, particularly for the faltering real-estate sector.
Last week, the country reported underwhelming economic growth of 6.3% for the second quarter, against the 7.3% that had been expected.
Economic growth in China was better in June than in April and May, but China’s housing sector continues to hamper progress with supply outstripping demand. Housing sales in June were down by just over 37% in real terms, compared with four years earlier, according to data compiled by Evercore.
Hope has hinged on this month’s meeting of the politburo, which usually sets out economic policy guidance for the second half of the year.
China’s politburo on Monday pledged to step up support for the economy, focusing on expanding domestic demand, boosting confidence and preventing risks. But though this would seem to signal more stimulus steps — which would be welcome news — there was little firm detail on what this might entail. Added to this, some analysts think policymakers are unlikely to deliver any aggressive stimulus due to worries about growing debt risks.
The Chinese government usually leans towards stimulating construction, rather than upgrading existing property, because real-estate capital formation is a component of China’s GDP. The industry is also a big employer both of construction workers and employees at the mills and plants that supply the sector with materials.
This is why Beijing is coming up with other ideas. Such as a plan to construct dual-use public facilities in mega-cities across China that can be used as hubs in times of national emergency. Old neighbourhoods are also set to be revamped under the strategy, but this will do little for the demand for raw materials.
Freight rates may be low, but the demand is steady and seaborne dry cargo trade grew year on year during the first half of 2023 for major bulks.
Seaborne iron ore trade grew year on year by 5.8% during the first six months of 2023 and grain trade was up 4.9% as Ukrainian exports resumed and Brazil exported a bumper crop, according to Clarksons Research.
Coal was the clear success story with seaborne volumes up by 8.4% year on year thanks to a rebound in Chinese demand and the absence of the supply disruptions that hampered exports during early 2022.
Chinese demand rebounded “notably” during the first six months of this year after declining in 2022, although bulker markets have been held back by lower port congestion, according to Clarksons Research.
Shipping equities analysts at Jefferies last week highlighted that the present weakness in bulker freight rates is being driven more by factors that have no relation to China.
“Capesize discharges in China are up 7% [this year to date] with Brazil and Western Australia loadings up 5% and 2%, respectively,” the Jefferies team, led by analyst Omar Nokta, noted in a report on Friday.
“The number of monthly capesize discharges in China has increased from 543 cargoes in 2022 to 583 cargoes this year but this has been offset entirely by reductions elsewhere with world total ex-China down from 365 monthly cargoes to 326 cargoes this year.”
Clarksons Research has found that trade volumes for minor bulks, for which demand is not largely driven by China, declined by 1.6% during the first six months of this year compared to the same period in 2022.
The pessimism surrounding China has not been limited to the financial sector. Braemar Securities remarked in a report last week that sentiment in the market for dry freight forward agreements (FFAs) has been “marred by the continuously negative headlines coming out of China”.
The forward curve for capesizes, the segment most dependent on Chinese demand, has come under pressure this month. By way of example, the third-quarter contract lost almost $2,500 of its value during the first three weeks of July.
But things looked a little brighter on Tuesday this week. Following talk of economic stimulus from Beijing, Chinese stocks and the yuan jumped up and capesize FFAs followed. Front-month capesize contracts were trading as much as $1,000 higher than on Monday.
Meanwhile, Chinese demand for steel has been increasing slowly during July, excess inventories remain flat and exports have been healthy, according to analysis by MySteel, which expects steel prices to strengthen.
Optimistic news from China would mean the most for businesses that rely on sentiment and positive structural storylines to sell to investors, such as freight derivatives and equities — especially with earnings season just around the corner for public companies and at a time when spot rates remain subdued.
Dry bulk stocks have fallen around 30% on average from the highs seen in March, according to global financial services firm BTIG.
The firm last week lowered its price targets for bulker owners Eagle Bulk Shipping, Genco Shipping & Trading and Golden Ocean Group on the back of sinking markets and the mixed outlook for China.
This being said, BTIG thinks freight rates are bottoming out and has maintained its “buy” rating for the bulker stocks within its coverage. It has pinned its hopes on the “constructive” supply picture, with 3% fleet growth expected next year, just over half of the long-term annual average.
The low orderbook will provide support, but detailed and decisive stimulus from the Chinese government would be the major shot in the arm needed to revive bulker markets going forward.
