Dry Bulk Shipping Woes Likely Won’t End Soon
Oversupply is another problem that the dry bulk shipping industry is facing. Investors should watch the scrapping activity and the new orders placed.
China’s HSBC manufacturing PMI fell to 48.9 in April. This is the lowest level since April 2014. A reading below 50 indicates contraction.
China (FXI) has been producing steel in excess of its domestic demand for several years. As a result, steel exports from China reached record highs.
China consumes close to two-thirds of the global seaborne iron ore. In 2014, China imported 932.5 million tons of iron ore—13.8% more than in 2013.
Chinese ports’ iron ore inventory levels can impact purchasing decisions. Iron ore is the largest category of product shipment within the dry bulk shipping industry.
Brazil accounts for about 25% of the global market share of iron ore’s trade volume. Shipments out of Brazil are a key metric to watch. Its exports were weak in April.
Most of the world’s iron ore seaborne exports come from Australia. Port Hedland is the world’s largest bulk exporting port. More than 80% of its shipments go to China.
The total number of bulk ships scrapped in 2015 has been higher than during the same period in 2014. A total of 30 ships have been scrapped in May.
If the orderbook level continues to fall more from this point and demand continues to grow, we could see some life in dry bulk shipping rates and equities.
Secondhand vessels are delivered faster than newbuilds. As a result, secondhand vessels represent more of the short to medium-term outlook.
Newbuilds’ prices are falling as the new orders are declining. Combined with the demolition of vessels, this could help the oversupplied shipping industry.
The Baltic Dry Index is a leading indicator for the bulk shipping industry. It tracks a number of shipping routes and the transportation costs.
Dry bulk shipping got a major boost from China’s increased appetite for iron ore and coal almost eight years ago. Large ship orders are driving the current oversupply.
A slowdown in China’s automobile sector will negatively impact ArcelorMittal. Auto component manufacturers like Delphi Automotive (DLPH) will also be affected negatively.
The decline in China’s real estate climate index is an indicator that Chinese construction activity has slowed down. China’s real estate sector is a key driver of global steel demand.
Iron ore miners have been hit hard by the slowdown in China’s property market. A slowdown in the Chinese real estate industry is a major risk for the global steel industry.
Chinese real estate indicators continued to fall in April. Since land purchased for future development has come down, Chinese construction seems headed for a further slowdown.
US steel prices have dropped to global levels. Most steel companies expect service center inventories to decline in the first half of 2015 and increase in the second half.
China exported 8.5 million metric tons (or MT) of steel in April, a year-over-year increase of 11.6%. Chinese steel exports were less than 8 MT in February and March.
The latest economic indicators in the Chinese steel industry show a slowdown in China’s steel demand and thus steel imports. This is a major threat to the global steel industry.
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