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China’s June steel production shows strength, positive for dry bulk shipping

The significance of China’s crude steel production

Roughly 50% of the world’s total crude steel output occurs in China. As iron ore and coking coal are key inputs to steel production, crude steel production is a key driver of iron ore and coking coal demand. Since China imports 33% of its iron ore supply, this will also affect dry bulk shipping demand and shipping rates. So iron ore import volumes highly depend on China’s crude steel production growth. When crude production growth is solid, so are iron ore imports, and vice versa.

China Crude Steel Production 2013-07-25Enlarge Graph

Crude steel output remains positive

According to the latest information available from World Steel Association, China’s June crude steel production grew at a year-over-year rate of 7.39%. While this is lower than what we saw in May—which recorded an increase of 9.47%—it remains above the lows of 2012. Despite concerns about the government’s tolerance for lower growth and its move to cool the property market since the beginning of the year, monthly crude steel production continued its march higher from May.

Drivers of continuous strength in output

Lower iron ore and coal prices have both supported profit growth among steel manufacturers in China, even though steel prices have also fallen (see Must-know: Commodity prices and dry bulk shipping stocks). Plus, a continuous increase in crude steel output supports the theory that policymakers are unlikely to tighten monetary and fiscal stimulus by a large amount. Several other indicators, such as the real estate climate index (see Real estate market in China picks up in June, good sign for dry bulk shippers) and producer price index, are near the lower range of an economic cycle.

Outlook

Although investors should see lower crude steel production over the next two months due to seasonal maintenance shutdowns, you can expect year-over-year growth to stay at or above current levels. This is positive for dry bulk shipping companies such as DryShips Inc. (DRYS), Knightsbridge Tankers Ltd. (VLCCF), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM).

Learn more about indicators and drivers that affect dry bulk shipping companies

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