Dry bulk shipping demand growth will unlikely hit pre-2008 levels

By Xun Yao Chen, Industrials Analyst • Mar 13, 2013 11:51 pm

China's Iron Ore Import Volume 2013-03-11

China’s iron ore import volume is a significant metric of demand for the dry bulk shipping industry. As iron ore accounts for roughly 30% of total dry bulk shipping volume, and China contributes to roughly 2/3 of total iron ore imports, China’s iron ore import is an important business segment. When growth in iron ore imports slows down, so does revenue growth for dry bulk shipping firms such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Eagle Bulk Shipping Inc. (EGLE).

China iron ore import growth slows rapidly

From February 2009 to December 2012, China’s iron ore import volume grew at a rate of 5.7% per year using a line of best fit.¹ This is a significant decline from the rate of 17.8% over the years 2005 to 2008, caused by slower growth and changes to the structure of China’s economy. Economic activity is measured in GDP (gross domestic product) which includes consumption, government spending, investments and net exports.

Changes to economic growth, objective and structure likely the reasons

Prior to 2008, China’s GDP grew at more than 10% per year. Since then, the growth rate has fallen below 10% as the country grew and the government began to shift away from infrastructure related investment activities such as railways, buildings, roads and manufacturing plants. The trend is likely to continue as the government tries to tackle pollution problems, close the gap between the rich and the poor, increase consumption and rely more on domestic demand.

Trade volume will unlikely grow as fast as pre-2008 levels

The changes to China’s future economic growth will have two implications for dry bulk shipping firms. First, products such as grains may become more important to future shipping demand growth. Second, trade volume is unlikely to grow as quickly as it did during the pre-2008 era. Investors in dry bulk shipping companies hoping for a comeback in China’s economic growth may be disappointed. This is also applicable to the Guggenheim Shipping ETF (SEA), which invests in leading global shipping companies, including ones that transport dry bulks. As a percentage of total shipping revenue, dry bulk accounts for roughly 43%, according to IHS Global Limited.