Broker warns of 'potential disaster' to dry bulk

By Michelle Wiese Bockmann - Thursday 7 February 2008

Iron ore being loaded onto a bulker Iron ore being loaded onto a bulker
A “VERITABLE orgy” of newbuildings and slowing Chinese steel production could see a global downturn hit dry bulk shipping faster and much harder than expected, one of London’s most respected ship brokers has forecast.
 
The report outlined a series of new scenarios which could dramatically slow iron ore exports to China, which have been at the heart of the five-year bulk shipping market boom. With the global steel industry accounting for half of dry bulk demand, there are “potentially disastrous” consequences, Howe Robinson Shipbrokers warned in its annual dry cargo report. 

“I don’t think we’re bears,” said one of the report’s authors. “I just think we are highly cautious about certain things that I don’t think have been factored in yet.” 

The views found support from the International Steel Trade Association, which said China’s rising steel production accounted for 40% of global supply. 

China’s unforeseen and dramatic rises in steel production in the last five years has encouraged a huge expansion in the whole supply chain, including the ordering of bulk carriers and opening of new mines, said ITSA chairman Ian Sherwin. 

“China is a net exporter of steel, the EU is a net importer and the US is a net importer. These are the markets that determine trade balance and they are suffering a little,” Mr Sherwin said. 

Howe Robinson’s chief concerns centre on the longevity of the six-year-old commodity supercycle, the swollen bulk carrier orderbook, and a “highly likely” move by Chinese steel mills to use more domestic iron ore from the second half of this year, reducing cargo flows. 

“We are rapidly becoming much more concerned than the prevailing consensus and see ever growing downside risks for the shipping industry,” the report said. 

The dry bulk orderbook last year grew to 2,832 ships of 244m dwt, including a new generation of very large ore carriers to be delivered over the next five years. 

“We don’t believe our own orderbook figures,” Howe Robinson said, in what was an “embarrassing caveat”. 

But the “veritable orgy” of ordering added to question marks and uncertainty over tonnage flows in 2008 and beyond. 

A significant but as yet unexplained slowdown in Chinese steel production in the second half of 2007 was of “potentially great significance”, the report said. 

If the lull was caused by delays in building and commissioning new blast furnaces, the Chinese faced short and medium-term constraints. 

But if the slowdown was related to shortages of metallurgical coal to feed blast furnaces, there would be serious implications for the capesize fleet, which has driven the dry bulk chartering boom. 

“If we have reached a point in the cycle where coal has become a bottleneck in China, its implications for the iron ore trade and hence the dry bulk market are potentially disastrous,” Howe Robinson said. 

The report also raised the possibility China could switch to using more of its lower-grade domestic iron ore in steel mills to “settle a few scores”. Mr Sherwin said the technology had improved in the last five to 10 years to allow China to more efficiently use its domestic iron ore. 

Howe Robinson forecast Chinese steel production in 2008 to grow by 13%-15%, or 63m-73m tonnes, the lowest rate of growth since 2001. Likely expansion for international iron ore trade was around 100m-110m tonnes.

“If they [China] were to opt not to buy all the increase in international production, shockwaves would be sent through the international ore markets, and the capesize market would plummet if unsold stocks were permitted to build at the major ports of shipment for the first time in a decade.” 

Howe Robinson said these and other factors “are becoming very real concerns and may have a greater impact than expected, rather earlier than is thought.”


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