Archives for posts with tag: steel production

In English if you say “he’s gone west” you mean he’s a “goner” (i.e. dead). It’s a phrase the stock market might now be applying to China’s economy. But in China, if you “go west” you get to the town of Urumqi. It has 3 million people, per capita income of $11,000 a year, the Texas Cafe serves great Tex-Mex, and it’s China’s “fastest growing city”. Oh yes – and it’s the world city most remote from the sea (2,400km).

China Really Is A Big Place

The point is that, unlike any other developing region, China is a very, very big place. Many economists would classify China’s recent growth as typical of the “Trade Development Cycle” model. Economic development uses vast quantities of raw materials, for building infrastructure and stocks of durables. Then the focus turns to less material intensive products – there’s not much iron ore in a Gucci handbag. Anyway, it looks as if China might have reached this inflection point in its development cycle.

Previous Growth Regions

Forty years ago Europe and Japan went through the same process. Between 1965 and 1973 Japan was the miracle economy, accounting for two thirds of dry bulk trade growth – just like China. The problems began in 1973 as heavy industry, especially steel, reached unsustainable capacity levels. In 2001 China’s  steel output was 151mt, up from 90mt in 1993. Useful growth which brought China’s steel production in line with Europe’s output of 159mt. But by 2013 China’s output hit 815mt and is likely to be about the same in 2015. Familiar territory.

How Big Is Too Big?

The problem is figuring out when China’s trade development is overshooting. China is so much bigger than Japan and Europe. But by looking at the ratio of the growth in total Chinese seaborne imports to growth in Chinese industrial production, a change is apparent (see chart). If the ratio is over 1, trade is growing more quickly than industrial production – from 2000 to 2003 the ratio averaged 1.6. If the ratio is 1, seaborne imports and industrial production are growing at around the same rate – in 2004-12 the ratio averaged 0.9. Below 1 is bad news – since 2012 the ratio has averaged 0.4 and has been negative in recent months.

Good News & Bad

The good news is that China’s industrial production trend remains at about 5-6% per annum. There is still a long way to go in developing the economy, especially the inland provinces. The bad news is that the stagnation of imports looks suspiciously like the structural slowdown of a maturing Trade Development Cycle. For a while it seemed that coal might fill the growth gap, but with the new attitude to the environment, that seems less likely.

Pushing West

So there you have it. Lots of drama, but the underlying economics suggest that the Chinese economy is having normal development pains, intensified by its size and the pace of growth. For shipping this may not be the end of the road, but it’s time to take a careful look at the management of the business. When a customer the size of China gets growth pains, you just can’t ignore it. Have a nice day.

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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.

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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.

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