Archives for posts with tag: chinese

January 26th is Australia Day, a chance to celebrate all things Australian: vegemite, sporting prowess, BBQs, surfing, unusual (and frequently lethal) wildlife, digeridoos, Uluru, Kylie, Mad Max and so on. But from a shipping and seaborne trade perspective, perhaps the most relevant features of Australia are literally from the land ‘down under’, namely iron ore, coal and natural gas.

For the full version of this article, please go to Shipping Intelligence Network.

Bulkcarrier owners could be forgiven for feeling just a little bit dizzy at the moment. The unprecedented growth in China’s steel industry over the last decade has for years provided an adrenaline-infused experience in dry bulk trade. But with both Chinese steel production and iron ore imports registering a decline in the first half of 2015, is the playtime over?

Down To Earth With A Bump

It’s no surprise that the recent wobbles in China’s economy have been leaving dry bulk’s thrill-seekers with a nasty headache. Construction activity has slowed, and total steel use dropped by 5% y-o-y in the first five months of the year. Steel production has declined by a less severe 1% y-o-y, but this is still an unpleasant change of direction for those accustomed to average output growth of more than 10% per annum over the last ten years.

Round The Roundabout Again

Yet these worries over China’s steel industry are not new. According to China’s annual estimates, steel output growth in 2014 slowed to 1%, from 14% in 2013. However, iron ore imports increased in 2014 by a massive 15% to 914mt. Almost heroic growth in Australian iron ore production flooded the global iron ore market with cheap ore, displacing some higher-cost domestic Chinese ore production. Ambitious production expansion in Australia is still underway, and exports from the country are up 9% so far this year, but total Chinese seaborne imports are down 1%. So what has changed?

Balance Shifts On The See-Saw

This year seems to have proved a tipping point in the iron ore market. Weak Chinese demand is contributing to record low iron ore prices (dipping below $50/tonne in April). In 2014, the rapid drop in prices boosted China’s overall import demand, but no such positive effect is visible this year. Instead, the extent of the price drop has squeezed out a number of small iron ore miners across the world, and Chinese imports from many smaller suppliers have been depressed this year. And while Chinese miners have clearly reduced domestic production, there are questions over how much more capacity (particularly state-owned) will be cut.

Swings In Need Of A Push?

The unsettling thought for the dry bulk market is that the excitement of the Chinese ride could be coming to an end. Despite the price drop, most major ore miners are forging ahead with expansion plans. If China’s steel usage has peaked, miners will be fighting for market share in a shrinking demand arena. And if Chinese ore output proves resilient to price pressures, this could leave those expecting a resumption of firm iron ore trade growth with only a severe case of vertigo.

While global growth in low-cost ore production could still boost imports later this year, there is certainly no longer a consensus that China’s steel industry has considerable long-term growth potential. Faced with this ominous scenario, bulker owners will be hoping that the current weakness in China’s iron ore imports is only a temporary downward swing. Time will tell, but for some the playground which once spurred great excitement might be starting to lose its appeal.


Ingmar Bergman’s classic movie The Seventh Seal is about a knight who, during the Black Death, challenges Death to a chess match, in the hope that while the game continues he can put off his demise. This grim epic could be seen as a metaphor for the daunting progress through long shipping cycles, as one risk-laden move in the toxic chess game follows another.

August 2007 – The Game Starts

Today’s cycle started eight years ago in 2007. It was an epic year. Capesize earnings averaged over $110,000/day and merchant shipbuilding investment reached a record $229 billion (excluding offshore). But there was good reason to be apprehensive. In August the first signs of the financial crisis hit Europe, as interbank investors grew paranoid about the vulnerability of their counterparties to CDO exposure, bringing Eurodollar trading to a halt. Meanwhile analysts were worried that the Chinese super-boom would peak out after the Olympic Games in 2008. So although dry bulk investors were still making money and ordering ships, the solitary chess game with destiny had already started.

Mounting A Comeback

Seven years later the chess game is still going on. The financial crisis got off to a more dramatic start than anyone anticipated. In 2008 as panic swept through financial markets and trade credit became almost unobtainable, the world economy, including China, came precariously close to meltdown. But fortunately this time the politicians eased through the crisis successfully. China mounted a heroic infrastructure programme which gave bulkers a very decent boom in 2009-10. Following this the market fluctuated, but reached decent levels in late 2011 and again in late 2013.

Not Deadly Or Distressed?

As recessions go so far the game with destiny has gone quite well. Since the end of 2007 Capesize earnings have averaged $32,300/day and the market has soaked up 490m dwt of new bulkers. In 2013, 104m dwt of bulkers were ordered. So someone in the industry believed bulkers would win their chess game.

But in 2015 the game changed. Capesize earnings averaged only $6,212/day in the first half. For the first time signs of real distress are apparent. After 8 years, dry bulk sentiment finally collapsed and bulker orders fell from 16m dwt in January 2014 to 0.05m dwt in June 2015. A helpful step towards market recovery, but it leaves the shipyards with a problem. Over the last 8 years bulkers were a third of shipyard workload (see inset pie chart). Although tankers and container ships are still being ordered, they show no sign of filling the gap left by bulkers.

Dance Macabre

So there you have it. Bulkers have finally made a meaningful move towards better times by cutting investment. But the game isn’t over yet. They still need a strong world economy and continued Chinese import growth. Meanwhile a new chess game with destiny is getting started, this time in the shipyards as they try to plug the bulker gap. Maybe the game’s not over yet. So if you want a nice relaxing summer, our advice is don’t watch The Seventh Seal. Have a nice day.


Last week’s Analysis noted that demand cycles are part of the shipping industry scenery, and 2015 so far has seen some fairly mixed trade data to say the least. China has been at the centre of this, and there’s little consensus on the way that things might head next. There are a range of possible scenarios; which one is closest to the outcome will be key – the health of world seaborne trade could depend on it.

Lead Driver Slowing?

China has long been at the heart of the expansion in global seaborne trade. Between 2002 and 2014, 4 billion tonnes were added to the world seaborne total. Chinese imports accounted for 94% of the increase in iron ore volumes, 35% of the expansion in coal volumes and equivalent to more than 100% of the growth in crude oil trade. Chinese exports accounted for around 60% of the expansion in container trade volumes. However, Chinese volumes have been under severe pressure in 2015 so far. Based on latest year to date data, Chinese seaborne coal imports are down 40% y-o-y, on the back of increased anti-pollution measures and slowing thermal power generation. China’s iron ore imports are down 1% (up 15% in full year 2014), with steel production flat, and its crude oil imports are up by just 4% (up 10% in 2014). Chinese container exports are estimated to be just 4% up, with trade to Europe down 3%.

Lack Of Consensus

Although most observers agree that Chinese volume growth will fall this year, there is a clear lack of consensus on the extent to which it will do so. A number of scenarios could unfold, and the graph shows how some of these could impact on world seaborne trade growth based on possible trends in Chinese ore, coal and crude oil imports and container exports. Scenario ‘A’ is based on our latest estimates for Chinese trade in these major cargoes. ‘B’ is based on the (reduced) rate of y-o-y growth in the year to date being maintained for the rest of the year. ‘C’ allows for trade volumes in the rest of the year to be flat compared to 2014 monthly levels. ‘D’ is based on the growth rate for the remainder of the year in each cargo reaching the full year 2014 level.

Scenario ‘A’ puts 2015 world seaborne trade growth at 2.9%. But, ‘B’ and ‘C’ suggest overall growth in 2015 of 1.6% and 2.1% respectively; much lower than has been seen in recent years, and tricky news for the shipping markets, with world fleet capacity growing by more than 3%. Moreover, Chinese import volumes in a range of other bulk cargoes are also under pressure in the year to date, and the failure of these to see improved growth could lead to downside to even the most pessimistic of the scenarios here.

Been Here Before?

So, looking at the data, there are some relatively negative scenarios. But some might argue that we have been here before, and each time Chinese expansion has pulled through, maintaining the impetus behind global seaborne trade. China is a big country, and previously government stimulus has provided support (though there is debate over the potential impact of this factor in the future). There are many possible outcomes, but one thing is for sure, if healthy growth in global seaborne trade is to be maintained, the world will be looking towards China for improved volumes. Have a nice day.


Bond movies are great for pithy philosophy and the 1998 film The World Is Not Enough contains the following dialogue. Duplicitous heroine Elektra King: “I could have given you the world”. Bond: “The world is not enough”. Elektra King: “Foolish sentiment”. Bond: “Family motto”. Well, it’s glib, but businesses in the global marketplace today, especially shipowners, will see the point.

End Of An Era

Globalisation changed shipping, previously an imperial service industry, and over the last 60 years it has become a world industry. With a fleet of 58,000 cargo ships carrying every description of goods the world needs, it depends on its customer and the customer is “the world”. So maybe it’s worth stepping back and checking out what “the world” is actually up to today, because it’s busy changing.

Wealth Of Nations

Over the last 50 years, shipping’s world has been propelled forward by a succession of countries which launched their economies into global trade. It began with Europe in the 1950s and Japan in the 1960s, and developed with South Korea and the Tigers in the 1970s and 1980s (not a good decade for trade though). Then after a pause in the 1990s, China took over, creating a new development boom. All built on merchant shipping.

Broken China?

The history of these economic dynamos demonstrates that the super-booms they create have a limited life. It happened to Europe, Japan and Korea. Unstoppable headlong growth is replaced by sluggish cycles. Now this seems to be happening to China. Over the last 18 months, China’s seaborne imports seem to have levelled out. Shipping was rescued from a similar plateau at the start of this decade by China’s heroic infrastructure program. But not this time, it seems. “The darkest cloud is property” said a recent Economist magazine article about China’s economy. Since 2008 debt has almost doubled as a % of GDP, and growing out of trouble is not a realistic option.

Structural Shift For Shipping

No doubt China will find ways to rebalance its economy, but for shipping the big problem is that the resource intensive growth phase could be over. With spare capacity in both the shipping and shipbuilding markets, the industry desperately needs a new trade dynamo. But there are few candidates. Since 2008 China has generated around 50% of the growth in seaborne trade. Europe and the USA have declined and the growth of the other regions is dwarfed by China (see inset graph). Whatever may happen in the long term, in the short term there are no obvious candidates for China’s job.

Sluggish For Shipping?

So there you have it. China’s heroic position as a seaborne importer is changing and the import slowdown may be structural, not cyclical. That could leave shipping with a hole in its demand-side dynamics. India, South America, South-East Asia, and Africa all have a part to play, but are still waiting in the wings. So if forecasters promise you the world, just remember James Bond’s family motto: the world is not enough. Have a nice day.


The level of ‘forward orderbook cover’ is one indicator of the state of global shipbuilding. When times are tough, yards can find the race for the limited amount of ‘cover’ available difficult, but when times are better ‘forward cover’ can seem very supportive. In the face of slowing ordering volumes, the shipbuilding industry might take a look at this indicator as part of its regular health check.

Medical History

‘Forward cover’ shown in the graph (see graph note for the exact calculation) reflects the number of years ‘work’ yards have on order at recent output levels. In the 1990s yards averaged 2.5 years cover but following the ordering boom of the mid-2000s forward cover rose to over 5 years. The onset of the global recession saw ordering levels decrease significantly and orderbook cover had dropped below 2.5 years by 2012. But with yard output having adjusted downwards, a pick-up in ordering in 2013 helped cover expand to 3.5 years. However, investment slowed again in 2014, instigating a downward trend, and by early 2015 orderbook cover had adjusted to around 3 years.

Chinese Check-Up

Chinese yards have seen the most dramatic reduction in forward cover. As capacity created to meet boom demand came online between 2009 and 2011, output doubled. But investment levels decreased, the orderbook declined, and China’s forward cover briefly fell below that of its competitors in Korea and Japan in 2012, as Chinese yards were not as able to attract the increased ordering in the more specialised sectors. However, cover has since increased as active capacity has adjusted downwards and Chinese yards have regained the majority share of orders, slowly diversifying their product mix. Although overall cover has returned to pre-boom levels (3.6 years today), the situation varies substantially. Whilst state owned yards and a handful of private yards have a strong orderbook cushion, the vast majority of smaller local yards have limited cover.

Offshore Emergency

South Korea and Japan did not expand shipyard capacity to the extent as China, and their industries are much more consolidated across fewer yards. As such their forward cover did not swing so dramatically. The largest Korean yards responded to the downturn in merchant vessel ordering by entering the high value offshore market (the ‘big three’ Korean yards grew their offshore orderbook to around two-thirds of the value of all units they had on order). Yet whilst this provided relief for yards in 2011 and 2012 the downturn in offshore ordering in 2014 has contributed to forward cover at Korean yards (2.7 years today) falling below that of Japanese yards (3.0 years) for the first time. Japanese yards have been slowly improving forward cover partly due to a revival in export ordering backed by the depreciation of the yen against the dollar.

Today, whilst a long way from boom time highs, ‘forward cover’ looks more comfortable than two years ago. However, that’s not the only part of the health check and global shipbuilding has been through a period of immense turmoil and financial pressure. Moreover, with output stabilising and ordering currently suppressed, builders could well be checking their orderbook cover closely once again.


Over the last 15 years China has led maritime forecasters a right old dance. In 2002, rumours that Chinese iron ore imports were about to take off were hard to believe. In those days China’s total imports were below 400mtpa and the ore trade had been sluggish for a decade. But even the most bullish forecasters were way below target and in 2014 seaborne iron ore imports jumped 15% by 119mt to 914mt.

Ironing Out The Bumps

This was more than total Chinese seaborne imports which only grew by 65mt in 2014. Coal and metal imports both fell sharply, and the resulting 3% rise was the lowest since the Asia crisis in 1998. So dry bulk should say a very big thank you to Chinese iron ore importers for keeping some water under the hull.

Economic Discomfort

The problem now facing analysts is that the 2014 growth of iron ore imports does not appear to hang together with the rest of the steel economy. Construction slowed and shipbuilding output fell 14%. Overall steel demand decreased 3%, which makes the reported 1% growth in steel output look high. The real driver of import growth was a surge in low-cost ore production by major Australian miners, forcing out higher-cost mines in China and elsewhere. But estimates of the impact on domestic Chinese iron ore production vary, and official statistics suggest total output growth of 4%. Even after accounting for the falling grade of domestic ore, the figures don’t quite fit together.

Inscrutable Statistics

What’s going on? It’s a crucial question. Under-reporting of steel production could be a factor, and historical data has been revised up before. The 50% drop in iron ore prices last year may have led to stock building across the supply chain, or impacted domestic output to a greater extent than reported. Either way, it is clear that steel exports have surged, while strong Australian ore output depressed prices and kept Chinese imports firm.
Market Consequences

The worry for the dry bulk market is if Chinese demand falls enough to dampen imports. There are legitimate concerns that the construction and infrastructure programs which drove the steel industry over the last decade are facing serious problems. One issue is that the financial foundation of this growth is looking shaky. The debt to GDP ratio has risen sharply since 2010, much of it “back door debt” arranged by the provinces. As one leading economist put it at a conference in Long Beach California this week, “no country has ever escalated debt on this scale without something happening”. He thought the options are a crisis or a decade of slow growth.

Troublesome Times?

So there you have it. Thanks to Chinese steel, in the 2000s the bulker market enjoyed the biggest boom in history. Whatever the position over the debt mountain, readjusting the capital side of the economy will take time. A positive response is that we’ve been worrying about Chinese trade for the last 5 years – somehow the accident never happened, and there’s more low-cost mine expansion underway. Will our star performer continue to ride its luck? Time will tell. Have a nice day.