No improvement on demand outlook
Iron ore and coal imports from China remain weak. The outlook also remains bleak, as steel prices remain depressed. Steel mills have started cutting back on production. This should continue to weigh on the dry bulk sector, especially the Capesize and Panamax vessel freight rates.
China has been diverting its excess steel capacity into exports. Lately, there’s a growing resistance from Europe and the United States (SPY) (DIA). As a result, more trade cases were filed. This will likely result in a fall in exports from China going forward. The consumption side has most likely gone in for a structural change as the Chinese economy shifts from investment-led growth to one driven by consumption.
Most of the market participants, including dry bulk companies, believe that high fleet growth and a weak Chinese (FXI) steel market will keep the lid on dry bulk rates in 2016 and maybe into 2017. After that, the current orderbook will be delivered. In the absence of significant new orders and continuing high demolition rates, the market might find a balance, although at a rate lower than the previous highs.
For the time being, the mismatch between demand and supply could continue hurting dry bulkers. Any additional Chinese domestic iron ore supply displacement by low-cost iron from miners such as BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale SA (VALE) could provide some relief to dry bulk shippers in 2016. However, a sustained recovery still doesn’t seem to be coming for dry bulkers such as Navios Partners (NMM), Navios Maritime Holdings (NM), DryShips (DRYS), and Ship Finance International (SFL).
Vale forms 2.9% of the iShares MSCI Brazil Capped ETF (EWZ).
To find out more about which dry companies can endure the long-term pain in the sector, please read Which Dry Bulk Companies Can Endure the Prolonged Downturn?
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