Archives for posts with tag: iron ore

By the late 1800s, the shipping industry had been transformed by the introduction of steam power and iron ships. Coal and grain were two of the most important cargoes, alongside timber, sugar, cotton and tea. While technology, the sheer scale of the business, and the global cargo mix, have of course all changed since then, dry bulk cargoes have retained a position at the heart of global seaborne trade.

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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.


During a single weekend in February, after standing for four years, the ski jumping world record was broken twice within a 24-hour period. As those in the shipping and offshore industries know, these skiers are not the only things which have been heading rapidly downwards in quick succession: some of the commodity prices for major raw materials on which the markets rely have equally fallen far.

Synchronised Flight

The price of oil and the price of iron ore over the last seven years have shown a remarkable degree of correlation (see graph). This similarity extends as far as the recent price declines: the oil price is down 50% on the summer, whilst iron ore prices are 60% below start 2014 levels. Should we be surprised by this similarity? Clearly, this is a valuable reminder that correlation does not necessarily equal causation. In direct terms, neither commodity shares a supply or demand side: one cannot be substituted for the other.

In reality, of course, all commodities do share general economic factors on the demand side, including China. Both iron ore and crude oil have been affected by a cooling in Chinese demand, as have a range of other commodities (though some, like copper or rare earths, have little impact on bulk shipping).

However, there are also differences at the broader level. The western hemisphere makes barely a dent in world steel production (which drives ore usage), with the US accounting for 5% of global output and Europe 9%. This makes Capesizes more dependent on China than, say, VLCCs, given the 40% of global oil demand accounted for by Europe and America. Granted, the west helps to support Chinese iron ore demand (expected to exceed 1bn tonnes in 2015), as steel is used for manufactures, some for export (via containerships). But, equally, China is no longer exclusively an export economy. Domestic demand for all sorts of manufactured goods is now an important factor supporting their imports of both raw materials and consumer goods (China even has a growing ski industry in the North-East, and is bidding for the 2022 Winter Olympics).

The (Supply) Jump

Whilst construction for China’s previous Olympics noticeably boosted its demand for all sorts of imports, most will be hoping for better market fortunes somewhat earlier than 2022. So will many exporters: one factor shared by both oil and iron ore is the heavy investment made in new production, whether that be expenditure on Australian mines (capacity is now 95% up on 2010) or in offshore (3.0% growth in offshore oil output in 2015 is projected: the most since 2000). Both commodities now face a period in which supply growth may outpace demand growth.

A Good Landing?

So, despite clear differences, the recent fortunes of oil and iron ore prices have much in common, with supply and demand issues to confront. There are some signs that the decline may now have been arrested, and price stability would at least alleviate the uncertainty that makes investment hard to plan. But nonetheless there will be many hoping that, like a keen skier, prices now get on the lift back to the top of the hill.




Eleven years ago in 2003, when China opened its doors and the steel boom got underway, the shipping community was suddenly presented with an ‘Aladdin’s Cave’ of cargo. Unlike Japan and Korea, China had not locked in the fleet of ships it would need. So the escalating imports of iron ore soon turned into a gold mine for shipping. With so much cargo and a limited fleet of ships, Capesize rates surged.

Unexpected Riches

Shipping has always done well out of “miracle” economies, but the Chinese growth surge which followed was special. In the next decade, Chinese industry, especially steelmaking, grew faster than anyone could possibly have predicted. In 2003 the Chinese government thought steel production would reach 300mt in 2010. Actual output in 2010 was 627mt. The effect on trade was profound. China’s seaborne imports quadrupled, reaching 2 billion tonnes in 2013, by far the most any country has ever imported in a year. The freight boom this triggered between 2003 and 2008 was also arguably the best in the industry’s history.

Even after the Credit Crisis in 2008, China kept expanding, with just one short-lived wobble in 2009. This growth helped cushion shipowners from a 1980s style meltdown that might otherwise have hit the bulk and container markets.

Unavoidable Evolution

But in the real world, economies move on and there are many signs that change is underway. China is a very big country, and some provinces are still poor, but across the economy activity is slowing. Industrial production growth fell to 6.9% year-on-year in August and the dollar value of export trade, which for many years grew at about 20-30% pa, only managed 8% in 2013.

The real change this year has been in steel and construction. Official statistics suggest that floor space under construction is down 17% year-on-year and house completion is down about 30% this year. Some Beijing analysts are predicting much lower house building over the next two years. Although iron ore imports are up by 18% year-on-year, steel production is only growing at 5%. Not a good omen. Meanwhile steel prices have slumped another 5-10% and steel exports are up 37%. All signs of market weakness.

Value-Added Production

Of course these trends could be cyclical, but China is a very different economy from 10 years ago. A new generation has grown up with computers, smartphones, cars, fashion and confidence. Environmental concern, which triggered the impending ban on high sulphur coal imports, illustrates the way these changes can trickle through into trade.

New Trend, Old Story

So there you have it. China’s sprint for growth is easing off and it is projected that imports will grow 5% this year. This is way below the 10-20% pa of the boom years. It happened to Japan and Europe in the 1960s and to South Korea in the 1980s and 1990s. So does that mean ‘Aladdin’s Cave’ is empty? Such a big cave with so many dark corners, makes it hard to say, but it’s a serious issue for investors. Have a nice day.


Currently, the news seems full of warnings about the health of the Chinese economy. If it’s not worries over the extent of lending by the so-called “shadow banking” system, pessimists would have us believe that China is on the brink of a catastrophic housing bubble, or point to the impact of pollution reaching new highs in major Chinese cities. How should the shipping industry evaluate these issues?

What’s At Stake?

Of course, anything which harms the Chinese economy will generally be bad news. As the Graph of the Week shows, the Chinese economic miracle has been built on an import/export boom some distance in excess of the rest of the world’s efforts at trade growth, with Chinese trade growth accounting for over 90% of global expansion in some commodities.

The two drivers of the Chinese economic miracle which has transformed the shipping industries have been consumer exports, fuelled by cheap labour, and infrastructure investment in construction in China. These two factors are mutually interdependent: the share of the Chinese population living in cities has increased from 35% to 50% since 2000. All these new urbanites need housing, boosting construction. And what does this require? Steel, of course. Construction of housing for urban migrants, along with factories to employ them and services from shopping malls to roads and railways, has spurred Chinese seaborne iron ore imports to nearly 900mt p.a. The effect on the Capesize fleet needs no repeating.

If You Build It They Might Come

The real problem is not all of the construction is where it is needed: there are several virtually uninhabited brand new cities in Inner Mongolia, and a replica of central Paris (with Eiffel Tower!) in Zhejiang province. Signs of a slowdown in these sorts of construction projects have contributed to iron ore prices at the lowest levels in nearly 2 years.

Much of the construction effort of the last few years has been fuelled by fairly easy access to credit, with less conventional “shadow” credit a worry for some. Consumers have also taken on debt to increase their spending power. As more citizens begin to drive cars, oil import demand is stimulated. As they gain disposable income, demand is also generated for goods which drive expanded intra-Asian container trade and a greater need for imported manufacturing materials.

Pollution is another problem China now seems to be taking seriously. This is a bearish sign for areas of heavy industry including iron ore and crude oil importers, particularly the large number of steel mills in Hebei province, near Beijing.

Bad News? Or Not?

So, negative talk about the Chinese economy abounds. But time and again in the last decade, China has surprised (sometimes with the help of a little fiscal stimulus, admittedly), and a controlled deceleration remains the most likely outcome. Reports suggest that GDP growth will struggle to meet Beijing’s target of 7.5% this year. But a near miss would still be a growth rate that most other economies would love to be faced with. Moreover, industrial production in June was up 9.2% year-on-year, the fastest rate this year: maybe China still has the ability to surpass expectations. Have a nice day.


How fast will ship demand grow? It’s the ultimate question for serious shipping investors. Today’s global economy relies on owners stepping up to invest in the ships that will be needed in the future ($115 billion was invested in new contracts last year). With so much cash on the table, the future trade growth issue cannot be ignored. But it’s tricky and even experienced analysts fall back on “rules of thumb”.

Faster Than World GDP

When they worry about the future most shipping investors have the world economy at the back of their minds. But although world GDP is the obvious starting point for analysing sea transport, the relationship between the world economy and seaborne trade growth needs handling with care. Unfortunately things do not always turn out the way investors expect.

For example, over the 50 years since 1963 these two key ship demand variables have increased by a not too dissimilar amount. GDP grew on average at 3.7% p.a. and sea trade grew at 4.5% pa. Overall trade volume increased 722% and GDP by 501%. If the relationship had been steady, the ratio of trade to GDP would have followed the path shown by the dotted line on the graph, moving steadily up from 100% in 1963 to 137% in 2013 (i.e. the sea trade index 37% higher than the GDP index, both of which were 100 in 1963). Interestingly today’s GDP forecasts are close to the 50 year trend, with projected growth of 3.6% in 2014 and 3.9% in 2015. So does that mean about 4.5% trade growth?

Sea Trade Multiplier?

That’s not always how things happen. The red line shows that the “sea trade multiplier”, which compares the cumulative year by year growth in the sea trade and GDP indices since 1963, was all over the shop. In the 1960s trade shot ahead of GDP and the multiplier reached 160% in 1974. Then the relationship reversed and in the period 1980-88 sea trade growth averaged only 0.4% pa compared with 3.2% pa for GDP. Again in 2005-09 trade lost ground as GDP growth averaged 3.5% pa and trade only 2.4%.

Structural Changes

This analysis suggests that when looking ahead more than a year or two, the structural changes that lie ahead are more interesting than the trend. The 1960s boom was driven by the OECD countries adjusting to global free trade by importing massive quantities of bulk commodities like iron ore and oil. Then the trade collapse in the 1980s was a structural response to high oil prices. And the trade slowdown in the late 2000s shows that the slowing OECD economies (less growth and more services) were important enough to shave the top off the Chinese mega-boom.

Brave New World

So, demand trends are all very well, but structural changes may matter more. Today high energy prices are squeezing the oil trade and the non-OECD world, which is increasingly important, seems to be moving into a different phase of growth. Although the 4.5% trade growth “multiplier” scenario looks convincing, remember that it is during structural changes that shipping fortunes are often made and lost. Have a nice day.


Last week, we looked at which countries occupy the leading positions in terms of the supply side of shipping: that is, who owns all the ships. This week we follow-up by looking at which countries contribute the most to the demand side of the industry. Which countries account for the largest portions of global demand for shipping? And which countries are punching above their weight?

Key Trade Players

In total, world seaborne trade is estimated to have reached just under 10 billion tonnes in 2013. Bulk cargo trades in dry bulks, liquid bulks and gases represented 85% of this total, or a massive 8.4 billion tonnes. Overall, world trade has grown at an average rate of 3.8% since 2000. The Graphs of the Week show which countries have contributed to this, and now have the largest shares of 2013 bulk trade by sea.

China Wins, Of Course…

It will come as no surprise to anyone that China is the country with the largest portion of overall seaborne bulk trade, with a 13% share of the total. China’s imports (a massive 1.8 billion tonnes) represented 23% of global imports in 2013, including nearly 800mt of iron ore, 286mt of crude and products and 308mt of coal. Of course, China has a much lower (2%) share of those commodities’ global exports. On the other hand, its containerised exports represent around 25% of global trade in TEU terms.

The ten countries shown on the graph account for just over 50% of the world’s seaborne imports and exports of bulk cargoes, meaning that, given that there are in excess of 250 countries globally, world bulk trade is quite consolidated around a relatively small number of countries. Indeed, the top three countries account for more than 25% of the total.

No EU countries feature in the top 10 countries, demonstrating the impact of the rise of developing Asia. Then again, if considered en bloc, the EU has 14% of world seaborne bulk trade: exceeding even China, although not by much.

Using their Chance?

So, what about those countries punching above their weight? Excluding island microstates, the country with the largest ratio of trade to population is Qatar, with 94 tonnes of trade per capita. Qatar is the world’s largest gas exporter, with 33% of world LNG trade and 16% share in LPG. Other countries high on this ranking include several other Gulf states, and the sparsely-populated raw materials export giant that is Australia. However, in 2nd place is Singapore, which imports more bulk cargoes than it exports, given its status as an oil refining hub. China is just 127th place for trade per capita, while India is 181st.

Overall, the graphs confirm the importance of a list of countries which will be well known to all involved in global shipping. At the heart of world trade are a group of big raw materials exporters, along with the consumption-driven states of the developed world, plus major developing economies. All four of the key BRIC developing countries feature on the graph. Many of the so-called VISTA countries feature in the next 20 countries not shown: could they soon begin to move up the table?