Threat of dry bulk doomsday scenario is real

John McLaughlin - Tuesday 13 May 2008

Containerised exports from China might see a sharp decline. Containerised exports from China might see a sharp decline.

THE dry bulk market has been given a glimpse of its ultimate nightmare scenario. “If the sub-prime crisis gets worse, containerised exports from China might see a sharp decline due to decreasing demand from importers. 

“Next to suffer, absolutely, would be the dry bulk market. With recession in the developed economies, decreasing exports out of China would reduce demand for dry bulk imports, including iron ore and coal.”
The harbinger of this potential doom was Simon Young, deputy director of the research and development centre at China Ocean Shipping Group. He was speaking at this week’s Mare Forum conference in Sorrento, where faith in China’s growth potential was repeated with almost devotional fervour by Italian shipowners. 

Mr Young said that that faith would be important in the months and years ahead. “Shipping is standing at a key point. The confidence of the players will be decisive in determining its direction.” 

China’s recent growth levels in excess of 10% may yet continue for some years to come. For Mr Young, however, the challenges facing China are also very real. Until recently, he said, the worries had been all about an overheating economy and the inflation that comes with it. 

“Now there are concerns over a slowdown as well,” he said. “Though foreign direct investment is doing fine, exports are going down. In the first quarter, steel exports were down almost 20%. If that continues through the year, it means less iron ore demand.” 

In addition, China will almost certainly have to adjust the renminbi exchange rate mechanism later this year as the dollar and euro pull in different directions. Inflation is also hurting China’s competitiveness and is expected to prompt the departure of foreign investors in some areas of China this year. 

All the same, there are plenty of reasons for the market to be cheerful. Mr Young traced the beginnings of China’s unprecedented growth surge to its entry into the World Trade Organisation in 2002 and its subsequent embrace of globalisation. 

Six years on, it is pulling in $70bn in foreign direct investment annually and making inroads in high-technology fields. It has also commandeered an 11% share of global GDP and 10% of world trade. 

As a producer and consumer of materials such as coal, iron ore and steel, key energy sources for the dry bulk trade, its development has been similarly impressive. It is now the world’s largest iron ore importer, and produces one third of the world’s steel as well as 2.5bn tonnes of coal. 

Mr Young noted that a dry bulk trade once driven by the seasonality of crops “now follows the iron ore contract negotiation process. With iron ore, things are crystal clear. We know how much we need exactly and where it is coming from. But what follows iron ore?” 

His answer, and K Line appears to have reached the same conclusion: “Coal will be the next commodity to drive the market.” 

With Chinese demand growth outpacing increases in domestic supply, coal imports into the country are rising fast, exceeding 1m tonnes in the first quarter of this year alone. 

In both iron ore and coal markets, he added, suppliers were putting increasing pressure on Chinese buyers; he said 50 iron ore shipments out of Brazil had been cancelled as contract talks went on, adding that suppliers were increasingly emphasising spot sales 

As China industrialises, it is investing heavily in the infrastructure to take it further; it now has 53,000 km of motorways, compared with nothing 30 years ago. And development in general is pushing ever further out from the prosperous coast. 

As for its foreign trade profile, Mr Young made clear that slowdown in the US was not necessarily as frightening a burden for China as it might appear, with trade with India and Russia rising 50% and 80% respectively last year, albeit from low levels. 

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