Richard Scott, Bulk Shipping Analysis
Over the past year economic activity around the world slowed further and, in some countries, a return to recession was experienced. Yet global commodity import demand continued growing. Based on very provisional figures, world seaborne dry bulk trade seems to have expanded by 4% or more in 2012. This result represents a decent outcome amid decelerating growth in many of the industries which use these commodities.
Prospects for dry bulk trade in 2013 are heavily dependent on whether the world economy’s performance weakens again or, as optimists argue, begins to pick up. Business and consumer spending in a number of countries may revive if confidence improves, although government spending is likely to remain constrained. Expectations of a revival in industrial output imply strengthening import demand for numerous commodities.
Recently there have been some clearer signs that another deterioration in global economic activity can be avoided, and a slowly improving trend may emerge. Evidence pointing to a turnaround towards stronger expansion in China has been especially notable. Elsewhere more convincing indications are still awaited, particularly in Europe where recession seems set to persist in the early months of this year, at least. Seaborne dry bulk trade in 2013 could grow at a quite healthy pace, possibly at a 3–4% rate. Additional volumes in the minerals sector are likely to form a large part of the incremental overall quantity. Extra iron and coal shipments, in particular, may represent over two-thirds of the total increase in all cargoes.
ECONOMIC GROWTH ASPECTS
The latest half-yearly report of the Organisation for Economic Co-operation and Development, published at the end of November, underlined the very difficult circumstances facing the world economy. According to the authors,“after five years of crisis, the global economy is weakening again...the risk of a new major contraction cannot be ruled out”.
However, based on a crucial assumption that governments’ policy actions will be sufficient to avert large adverse risks, the OECD expects recovery to begin during 2013. As shown by table 1, GDP growth within the OECD area (mainly comprising the advanced economies of USA, Europe, Japan and South Korea) this year is forecast at a very modest
1.4%, similar to last year’s average increase, followed by an acceleration in the following twelve months.
This sluggish progress envisaged is described as a hesitant and uneven recovery with growth “struggling to accelerate through 2013”. Even in the USA, where a relatively good performance may be seen, GDP growth may be only around 2% next year. The eurozone probably will remain in or near recession for some time. In Japan, after an improved performance last year when there was a bounce back from the impact of the natural disasters in the previous year, a slowdown is foreseen.
Why is activity among these highly-developed economies so sluggish? One key reason emphasized by the OECD’s report is weak confidence, which deters spending, both by businesses and consumers. This is occurring against a background of deleveraging (paying down debt), fiscal consolidation (tax increases and cuts in public spending) by governments, and high and rising unemployment in some countries.
In China a rather better outlook is emerging. If this view proves accurate, it could greatly assist global economic activity as a whole. China’s annual GDP growth has slackened by almost three percentage points over the past two years, from 10.4% in 2010, to an estimated 7.5% in 2012. But in 2013 an acceleration to 8.5% is forecast, aided by renewed emphasis on infrastructure and housing investment and looser monetary policy.
A World Bank report published last month focuses attention on the favourable impact in China of easing credit conditions and
benefits from additional public spending on investment. The Chinese authorities recently accelerated approval of a large number of major projects including urban rail systems, highway construction, city infrastructure projects, and ports and waterway development, with a total value of more than
Rmb 1,000 billion. These projects could provide a substantial boost for the economy.
Emerging market economies as a group — including China, India and others — look set to continue to outperform (compared with the advanced countries). In many emerging countries, there is greater scope for government monetary and fiscal policy action to support economic activity. There are already clear signs that growth is beginning to pick up after an extended period of softness.
STEEL INDUSTRY MINERALS
Economic progress and patterns can be directly related to the steel industry raw materials trades, primarily iron ore and coking coal. During the past twelve months these movements have been restrained by weakness or slower growth in steel demand and production in Europe, Japan and Korea.
By contrast China’s imports of iron ore strengthened robustly last year, despite slowing economic growth and its adverse impact on steel requirements. Unlike other key importing countries, output from the large domestic iron ore mining industry is also a factor affecting Chinese purchases from foreign suppliers. Greater proportional dependence on these foreign sources boosted import demand from Chinese buyers.
Estimates of steel demand in key countries, published by the World Steel Association last October, highlighted contrasting changes in steel demand taking place. After the robust 2011 year, when global apparent steel use rose by 6.2%, the 2012 increase was expected to be only 2.1%. A deteriorating trend in the European Union was especially marked, from a 5.9% increase in the previous twelve months, to an estimated 5.6% reduction last year.
In 2013 world steel demand growth will become moderately stronger, at 3.2%, according to the WSA’s figures. This improvement could be assisted by resumed but modest expansion in Europe, together with slightly quicker 3.1% growth in China, although in Japan a slackening trend is expected. These forecasts still seem valid, but some signs in recent months point to prospects for China improving further.
Iron ore and coking coal movements associated with the steel industry together comprise over one-third of global seaborne trade in all dry bulk commodities, and are the largest element. Last year iron ore trade, which is the biggest part of that category, apparently grew by over 4% based on partial information, and a similar expansion rate seems achievable this year, as shown by table 2.
Forecasts of China’s import demand are a key item, because these movements dominate global seaborne iron ore trade, comprising about two-thirds. The latest quarterly report by Australia’s Bureau of Resources and Energy Economics (BREE), published in mid-December, suggests that China imported 730mt (million tonnes) in 2012, a 6% increase, and predicts a 5% rise to 769mt in 2013. These quantities include some land trade, but are mostly seaborne.
This positive view of China’s iron ore imports is based on expectations of the country’s steel consumption, during the year ahead, increasing again by about 4%. A similar percentage rise in crude steel production is forecast to result, raising the total to 732mt. Benefits from infrastructure projects and stimulus spending authorized by the Chinese government are envisaged, while higher steel products exports could also strengthen output volumes.
Coking coal imports into China are on a much smaller scale, but still sizeable. BREE estimates 49mt last year, followed by 58mt this year. Among other key steel producing countries importing coking coal, some additional volumes are foreseeable during 2013. A positive trend in India, where an upwards trend has been under way for several years, is a notable development.
Global seaborne coking coal trade as a whole evidently increased over the past twelve months and signs indicate further growth in the year ahead. Import demand prospects are not entirely bright, however. Sharply higher volumes in China and India could be accompanied by little or no growth in purchases
by many European countries and Japan, reflecting fairly flat steel production trends in those areas.
POWER STATION FUEL
The second part of coal trade, much larger than coking coal, is steam coal which is used mainly in power stations but also in the cement and some other manufacturing industries. Seaborne trade in this sub-sector appears to have expanded quite rapidly by about 7% last year. Some estimates point to good prospects for sustained growth in 2013, possibly reaching 5–6%.
Strongly rising demand for electricity, expansion of coal-fired generation capacity, and greater reliance on foreign supplies in some countries which have domestic coal mines, are factors contributing to the upwards steam coal trade trend. Among Asian countries these features are especially prominent.
Despite environmental pressure encouraging switching to alternative, cleaner fuels, the economic advantages of coal remain compelling for many countries. Difficulties in the nuclear power industry have also reinforced a focus on steam coal, although competition from natural gas is intense. Two countries still emphasizing coal-fired power generation are India and China, and imported supplies seem set to have an expanding role in both.
Another positive influence affecting steam coal trade has been additional volumes following Japan’s severe earthquake and tsunami in early 2011. Major nuclear generation plants were damaged and this disaster led to the shutdown of the country’s entire nuclear capacity, only a small part of which has been re- opened subsequently. Coal consumption, based on imported supplies, as well as usage of other fuels, benefited.
India’s upwards trend in steam coal imports reflects rising power output from expanding coal-fired generation capacity. Another factor contributing to a tight market is shortfalls in supplies from the huge domestic coal mining industry. Steam coal imports may have exceeded 100mt last year and further strong growth looks certain, although the exact pace of development is less clear. Several vast new coal-fired power stations are being built at coastal locations accessible for imports.
Steam coal imports into China also have grown rapidly in the past few years, possibly reaching around 170mt in 2012, and there is potential for further expansion. Domestic coal mines supply most of the market, but shortages are periodically apparent. Competitive delivered prices for international supplies are often attractive for many buyers, particularly those located at or near the coast in the southern provinces at a great distance from domestic mines.
FOOD AND FEED
Seaborne trade in grain, oilseeds and other bulk agricultural commodities is also influenced by variations in economic growth trends. Over the short term, however, changes in weather patterns affecting domestic crops in importing countries, or harvests in exporting countries, are often the main determinants of global trade in this sector.
During the past twelve months as a whole, seaborne grain trade (usually defined as comprising wheat, corn and other coarse grains, plus soyabeans) evidently increased moderately. In the 2012 first half positive developments were prominent, followed by a weaker period in the second half. After mid-year reduced supplies available from a number of key exporters, coupled with higher international prices, began greatly restraining global import demand.
Statistics prepared on a crop year basis emphasize the weakness now clearly visible. Forecasts published at the end of November by the International Grains Council suggest that world trade in wheat and coarse grains could decline by about 16mt or 6%, in crop year 2012/13 ending mid-3013. From 270.2mt in the previous 2011/12 year, the total is expected to fall to 254.4mt.
Grain imports into China, the Middle East area, North and sub-Saharan Africa, and Mexico could be sharply lower in 2012/13. Positive changes are very limited. While Europe’s purchases may rise, the incremental volume is likely to offset only a small part of reductions elsewhere.
Dramatic changes among suppliers are evolving. IGC calculations show exports of wheat and coarse grains from the Black Sea region — Russia, Ukraine and Kazakhstan — falling by 19mt (31%) in the current crop year, down to 41.2mt. Exports from the USA are estimated at 62.4mt, a 14% decrease. Australia’s volume could decline by 16%, to 25.3mt. These downturns result from adverse weather diminishing harvests.
Although overall global grain availability is greatly diminished, not all changes among suppliers are negative. In particular, corn exports from Brazil could more than double in 2012/13, reaching a record high 20.5mt. Much larger wheat and other grain shipments from India are also a feature, estimated at 8.1mt, a 47% increase.
Soya trade, by contrast, appears set to continue growing, mainly because China’s import demand is still on an upwards trend. According to a recent US Dept of Agriculture forecast, world trade in soyabeans and meal during the 2012/13 marketing year ending September is likely to be over 4mt (3%) higher, at 154.6mt.
Rising soyabean imports into China reflect strong consumption trends. Usage of soyameal in livestock feed has been expanding rapidly, while soyaoil usage in food manufacturing and home cooking has also increased. Another influence is falling domestic soyabean production. Consequently, China’s soyabean imports are now huge, reaching 59.3mt in the past marketing year, and forecast to grow by a further 6% to 63.1mt in 2012/13.
Prospects for grain and soya trade later in 2013 are unclear at present. The mid-2013 harvests in northern hemisphere importing countries will have a large impact on foreign purchases. New crop production among exporters also will be
IGC forecasts suggest that world trade in wheat and coarse grains could decline by about 16mt or 6%, in crop year 2012/13 ending mid-3013.
influential. Much depends upon weather conditions, which are largely unpredictable, in all these countries over the months ahead.
The vast and diverse group of minor bulk trades comprises many commodities related to industrial and construction activity, plus a number of agricultural commodities. Altogether this group provides roughly one-third of total seaborne dry bulk movements.
Among the ‘industrial’ sub-group the most prominent, as measured by the largest volumes, are steel products and forest products. Bauxite and alumina, iron and steel scrap, cement, salt, petroleum coke, and nickel and other ores also are large elements. Within the ‘agricultural’ sub-sector, substantial quantities of sugar, rice, oilseed meals, phosphate rock plus other fertilizer raw materials and semi-finished fertilizer products, are components.
Growth rates in these trades vary widely, but an average of about 3% seems to have occurred last year, based on very tentative calculations. This increment is estimated to have raised the total seaborne volume to almost 1,400mt. Agricultural commodity movements growth probably was slower, because of reduced sugar shipments.
Import demand for industrial commodities during 2012 was restrained by slowing economic activity, or in some countries recession. Infrastructure and construction work, to which several elements are very closely linked, slackened or declined in a number of areas, with adverse effects on usage of inputs.
Over the next twelve months global seaborne imports of industrial commodities are expected to continue growing moderately. Additional purchases by Chinese buyers may be a sizeable part of this positive evolution. A pick up in China’s economic activity, based partly on extra infrastructure spending, could benefit minor bulk import demand as well as iron ore and coal purchases.
One trade where only very limited growth may be seen during 2013 is bauxite/alumina, after an apparent weakening last year. The latest BREE report estimates that world aluminium production increased by 2% last year, and may increase by less than 1% in the twelve months ahead. Closure of several smelters in Europe, a key raw materials importing area, is a negative factor. Conversely, China’s aluminium output is still expanding.