Why China is important to the dry bulk shipping industry

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Part 2
Why China is important to the dry bulk shipping industry PART 2 OF 9

A jump in crude steel output is positive for dry bulk shippers

China’s crude steel production

China produces roughly 50% of the world’s total crude steel. As steel production requires iron ore and coking coal, and China relies more and more on imported raw materials, China’s steel output is a critical fundamental indicator that affects how much traders will import. During the first quarter of 2013, China’s imports of iron ore made up ~75% of total iron ore shipments. Notably, crude steel production data can have a significant effect on trade volumes, demand for dry bulk ships, and shipping rates.

A jump in crude steel output is positive for dry bulk shippers

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August output growth jumps

In August, we saw a large jump in the number of crude steel being produced. The National Bureau of Statistics of China reported steel output of 66.28 million mt (metric tonnes), close to a 1 million metric tonne increase from July’s 65.5 million mt. Year-over-year growth also jumped from 6.13% to 12.91%.

The reason for July and August’s increases

Earlier in the year, investors were worried about the new government’s tolerance for lower economic growth to give them an opportunity to craft and implement reforms. But as growth fell to 7.5% during the second quarter of this year, the government stepped up public projects and rolled out tax cuts for small companies in order to stabilize growth and meet its target of 7.5% set for this year.

We aren’t seeing 2011 all over again

August’s data shows that China’s industrial activity reflects the result of these actions and also points out that output growth won’t decline from near 20% to 0% in 2011, when inflation was soaring high.

Even though the new Chinese government is still fixated on changing the fundamental structure of China’s economy to a more consumption-based model, we know it’s careful not to let economic growth fall drastically and halt growth momentum. Besides, urbanization should continue to drive demand for steel in the long run.

Connection to dry bulk shippers

As long as growth momentum doesn’t fall below 5%—near the lows of mid-2012, when industrial output also bottomed—steel output data will be positive for dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).


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