Growth in global steel production promises a more profitable year for dry bulk shipping in 2017
The dry bulk sector spent much of this year hoping that business would pick up. While there were slight improvements in terms of industrial production, steel production, coal trade and freight late in the year, a horrible first quarter weighed heavy on the industry as a whole and thwarted any real signs of a recovery for dry bulk shipping over 2016.
But 2017 looks different – the New Year will bring with it new hope for a recovery for dry bulk shipping, says head of Klaveness Research, Peter Lindström.
Mr Lindström says that the forward curve for the first quarter in 2017 is “substantially higher” than it was for the first quarter of 2016. If these forward curves are correct, Mr Lindström says that the dry bulk sector will be substantially up on a rolling 12 months’ basis after the first quarter of 2017.
As part of a presentation on the key drivers for dry bulk freight in 2016 and 2017, Mr Lindström highlighted some important trends for raw material demand in 2017.
“Growth in global steel production is positive for dry bulk demand and freight as it directly increases the demand for iron ore, coking coal, scrap and other minor ores that is used to produce different grades of steel.”
These included an improving growth rate in global industrial production and global steel production, and a positive trend in the global coal and grain trades.
On the supply side, Mr Lindström predicts low fleet growth in 2017 and 2018: “In our base case, we expect a fleet growth of 1.7% in 2017 and 0.7% in 2018. How low the fleet growth gets will to a large extent be a function of the freight market.
“We argue that scrapping, slippage and cancellations will be elastic to the demand growth. Effective supply growth will also depend on the speed of the fleet.”
Speaking to Baltic Briefing, Mr Lindström adds: “If freight improves in 2017 then we will see less scrapping and slippage will remain high. The bottom line is that fleet growth will be low, how low will depend on the freight market and thus the demand side.”
Steel production growth
Mr Lindström previously argued in a report published by Torvald Klaveness in November 2016 that the general trend of increasing dry bulk earnings since February 2016 is related to an improving growth rate in global industrial production.
In the report, Mr Lindström said that the trend in global steel production mirrors that of the global industrial production.
He added that global steel production had been especially strong in China in late-2016, with Chinese real steel consumption growth exceeding the steel production growth. This, together with increasing trade barriers, had led to lower Chinese steel export, he said.
Steel production has grown in other part of the world too, however. Between July and October 2016, the report revealed that steel production in the rest of the world was up 3.3 mt from the same period in 2015. The largest growth had occurred in India.
Smaller steel production regions also grew their steel production at rapid pace between July and October. Europe, Japan and South Korea all managed to post a small positive growth in steel production in the same period.
Mr Lindström’s conclusion in the report echoed his comments to Baltic Briefing that growth in global steel production is positive for dry bulk demand and freight as it directly increases the demand for iron ore, coking coal, scrap and other minor ores that is used to produce different grades of steel.
Regarding Chinese steel export, he says that if the countries that now import less steel from China switch to coking coal imports, then the global trade of coking coal will increase. This will be positive for the larger bulk carriers.
At the same time, Mr Lindström points out that while China relies heavily on iron ore imports, that might not be the case for those countries who are now able to increase their own steel production.
That said, risks to the growth in global steel production remain. Mr Lindström says: “If the Chinese real estate sector slows down, it will be negative for Chinese steel demand – and thus global demand – in the second half of 2017.”
Mr Lindström added that increased protectionism and trade barriers also have the potential to limit growth.