L&S in Norwegian finance magazine Kapital



(Click on picture to see article)

“As China’s GDP growth slows down, the market has responded with a negative view of the country’s role as a main driver in the world economy. China imports more primary commodities than any other country, and a lower GDP growth is initially an unfortunate development also for the dry bulk segment where rates are already dragging under the weight of tonnage oversupply. However, an estimated growth rate of 7.2% is not purely bad news, but rather to be viewed as the expected macroeconomic development after a number of years with a staggering growth rate of around 10 per cent. To put this in perspective, it can be mentioned that an average growth rate of 6% means the Chinese economy will double in size in less than 11 years. A China with a lower growth rate will still need to produce steel, and even though the rate is falling at the moment, data shows us that the steel production is increasing and being met by a higher than expected increase in iron ore imports. For the shipping industry the question is where this import will come from, and whether the Chinese will attempt to remain somewhat independent in the market by increasing its own domestic production. Chinese steel mills import more than 70% of the world’s seaborne iron ore, a formidable market by any standards. In 2013 the country imported more than 820 million ton of the mineral.

A ramp up of production coming online from Australia and Brazil this year has created an oversupply of iron ore in the market that at the time of writing, had pushed the price in US$ per ton down by 33 per cent since January. The falling prices of imported iron ore have pushed domestic Chinese mines with high production costs to curb production as steel mills choose cheaper spot cargoes from the import market.

This trend was also seen in 2012, but the low price level seems to be more prevalent this time, as major international producers have increased production and are signing new deals and licensing agreements. One example is Rio Tinto’s agreement to mine iron ore in Simandou in Guinea, an area estimated to hold some of the world’s largest iron ore resources. It is estimated that high cost Chinese producers will curb production as long as the price per ton falls below US$ 100. That major Australian and Brazilian producers are cutting costs and increasing production efficiency at mines is also adding to the perception that we will see a lower price level be a trend in the medium term. This opens for new possibilities in the shipping market. In 2013 China produced around 1400 million tons domestically (with 21% Fe content). A decrease in domestic production of 25 per cent could mean that they would have to increase the import volume by as much as 116 million ton (adjusted for 62% Fe content). An increase of this size could help adjust fundamentals in the Capesize market. Freight rates on Capesize vessels, which mainly operate in the iron ore trade, have been lying stable within generally low levels so far in 2014 due in part to oversupply on the tonnage side. With an increase in demand as a result of decreased domestic Chinese production, the freight rates might see an upwards push in the second half of 2014. (One possible scenario shows a rate of utilization climbing up to 90 per cent.)

At the moment the market is primarily focused on import volumes from Brazil and Australia, and the effect of these volumes on the freight market is dependent on how they are divided between the two exporters. There is little evidence to support the notion that we will see a large increase in the iron ore price levels in 2014, increasing the likelihood of increased import volumes going in to China in addition to increased activity in the Capesize market and higher returns for the segment going ahead.”

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