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Must-know supply and demand dynamics driving dry bulk shipping

Part 2
Must-know supply and demand dynamics driving dry bulk shipping (Part 2 of 7)

Why the World Bank shows China could still expand its trade

How important is China?

The answer to the question above is, as important as possible. It’s never irrelevant to mention China when talking about dry bulk shipping. In international trade, China’s importance persisted in 2013. Knightsbridge Tankers Limited (VLCCF) said in its latest dry bulk market outlook that China accounted for 83% of the global demand growth of 200 million tons. Last year, China imported a total of 1,500 million tons of dry bulk commodities, compared to 750 million tons in 2008. This represents approximately 35% of global dry bulk trade measured in volume and more than 40% in ton miles. With a population of more than 1.3 billion, China is the number-one consumer of commodities.

Openness IndexEnlarge GraphOpenness index 

To get a better sense of China’s significance in world trade, we can take a look at the five biggest economies’ openness index. An “openness index” is the ratio of a country’s merchandise trade (exports plus imports) over its GDP. This index measures the relative importance of international trade to a country’s economy, but this index is a little lagging compared to current trends since it’s published annually. An openness index doesn’t measure the absolute volume of trade but the size of trade relative to GDP.

Openness index analysis

The chart above lists the five largest economies in the world. Some readers may wonder why China has a lower openness index than Germany while being the largest trader in the world. In fact, note that the denominator of China’s openness index is its GDP, which is much higher than Germany’s. So the relative size of China’s trade is then adjusted. While Germany has a higher openness index than China, China exceeds them in its absolute amount.

A country’s dependence on international trade is largely determined by its natural resources and domestic market. For instance, the U.S. has adequate natural resources and a large population, so it doesn’t have to trade that much like Germany to reach optimal production sizes. However, China is quite unusual. With more than 1.3 billion people in the country, China’s demand for natural resources further exceeds domestic supply. Although China has the biggest domestic market in the world, the domestic consumers’ purchasing power fails to be a significant driver for domestic production. China is therefore more dependent on international trade compared to other large economies, such as the U.S. and Japan.

Potential growth in China’s openness index

Being a big country in terms of land area and population, China may never achieve an openness index as high as Germany’s, but China definitely has the greatest influence on international trade when taking into account the absolute volume of trade. The other thing that sets China apart from the other four countries is its openness index’s potential growth. The other four countries already have well-developed markets, and their commodity consumption has stabilized. In contrast, China is the only developing country that has one-fifth of the world’s population and an annual GDP growth of more than 7%. This indicates the great potential for China’s openness index to increase in the future as it becomes more integrated into world economy. Despite the recent slowing, China will remain the main destination for dry bulk shipping. 

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