China’s bearish demand set to hit bulker earnings

Coal imports have experinced muted growth, iron ore imports may have reached a turning point and soyabean imports have declined but perked up recently as US-Sino trade talks appear on the horizon.

News ID: 80341

Date: 02 February 2019 - 09:30

Iron ore imports may have peaked, while slowing manufacturing and economic headwinds could hurt bulk carrier demand this year, says BIMCO.

CHINA'S TOTAL SOYABEAN IMPORTS FELL TO 88M TONNES IN 2018, DOWN 7.9% FROM 2017.

SLOWING Chinese bulk import growth weighed heavily on the dry bulk shipping sector last year and could cause further demand-side weakness during 2019, according to BIMCO.

The shipping association said China’s total imports of iron ore and soyabeans fell 1% and 7.9%, respectively, year on year during 2018, with soyabean imports affected by declining purchases from US farmers as the US-China trade war escalated.

China’s imports of coal grew by 3.7% in 2018. However, the expansion was still bearish in comparison with the year-on-year import growth of 6% recorded in 2017, and 20% in 2016.

BIMCO’s latest dry bulk report noted that Chinese imports have assumed huge significance for the sector in recent years, so the deteriorating demand outlook could hurt owner earnings during 2019.

“Slower growth and outright declines in Chinese bulk imports will harm the shipping industry and the many shipowners who for years have relied on China’s growing imports to ensure employment for their ships,” said Peter Sand, BIMCO’s chief shipping analyst.

According to Nomura, total Chinese imports fell to “a much weaker than expected -7.6% year on year in December from 2.9% in November, the lowest point since July 2016”. In a new report released this morning, the analyst predicted “import growth is likely to continue contracting” as the Chinese economy slows.

China’s manufacturing growth expectations are also turning tepid, with the official January manufacturing Purchasing Managers Index indicating contraction, while the International Monetary Fund forecasts that global growth will fall from 3.7% in 2018 to 3.5% in 2019.

China’s iron ore imports totalled 1.06bn tonnes last year. Yet, although this was just 1% lower than a year earlier, BIMCO claimed the year-on-year decline — the first since 2010 — represented “a turning point” for the seaborne trade.

“Given new policies and more efficient steel mills, 2017 may have been the peak year for Chinese iron ore imports,” said the report.

Lower iron ore imports have not translated into lower steel production in China. Rather, more efficient mills that use scrap to produce steel have been able to increase production while reducing demand for iron ore. With authorities now setting targets to increase the use of scrap in steel production to reduce pollution, this could curb future expansion of iron ore imports.

“Iron ore imports may start to drop at an even faster pace than we saw in 2018,” said Mr Sand.

“Therefore, what is usually a mega-driver for dry bulk shipping demand may start to fade and dry bulk ships will have to look for new cargoes.”

Coal imports

Government policy is also set to weigh heavily on coal import growth. Chinese coal imports grew 3.7% last year to reach 281.2m tonnes. However, growth fell away as the year progressed.

In July, China imported 29.1m tonnes of coal and at this point accumulated growth was at 14.7%. After July, imports fell on a monthly basis, culminating in imports of just 10.2m tonnes in December with anecdotal evidence suggesting Chinese policy favoured a reduction in imports as electricity demand slowed.

“Chinese coal imports rely heavily on government decisions and policies and therefore remain a swing factor in 2019,” said Mr Sand.

In the grain sector, the key factor in 2018 was the escalation of the US-China trade war, which curbed transpacific movements of soyabeans to China.

Total China soyabean imports fell to 88m tonnes in 2018, down 7.9% from 2017. “A 25% tariff on US soyabeans arriving in China, which has been in place since July, and increased hostilities between the two nations is behind much of this fall,” reported BIMCO.

In 2017, China imported 32.9m tonnes of soyabeans from the US. Yet this fell to just 16.6m tonnes in 2018, which BIMCO estimated was equivalent to the loss of 218 panamax loads (of 75,000 tonnes each) on the transpacific trade.

China switched much of its import requirements to Brazil, which resulted in an extra 15.3m tonnes of soyabean exports by Brazil to China, the equivalent of an extra 204 panamax loads compared with 2017.

“Lower soya meal content in pig feed to reduce demand for soyabeans, tapping into stocks and increased imports from elsewhere have allowed China to shy away from US soybeans for the whole of 2018,” said Mr Sand.

“Ongoing trade talks and an apparent Chinese promise to increase imports from the US have led to Chinese buyers to slowly increase their imports of US soyabeans in the last few weeks of 2018 and into 2019. But the result of this round of trade talks will likely set the tone for this trade in 2019.”