There is an unfathomable optimism in the dry bulk sector. Maybe the unexplained buoyancy is because of remarkably low orderbook or China’s unexpected economic performance through the first half – whatever the reason 2017 is looking better than expected. As the summer calendar inches towards August, the BDI (Baltic Dry Index) again has like the wash from a splash, lapped over the 900 mark (at this writing 912 to be exact) and there is a curious optimism surrounding the dry bulk sector (see Matt Miller story on page 4). It’s a little hard to explain but real nonetheless. The year-to-date tally is down just over 5% but it is considerably better than 2016 which show lows of under BDI 300. Still back in 2014 – a date that seems long ago – the BDI cracked 2,000 on two runs and over 1500 for much of the year. Some of the reason for the optimism is the dry bulk carrier orderbook, or more probably lack of one. At the end of April, the dry bulk carrier orderbook was around 8.5% of the existing fleet (with delays in deliveries expected to push out orders even farther) – easily the lowest in modern history. Some reports suggest that construction hasn’t even started on 25% of the ship orders scheduled for delivery in the 2nd quarter of 2017. At the same time vessel utilization, has been largely between 80%-85% since 2015. To put this in perspective, at the height in 2013/2014 vessel utilization was around 90% while in the boom years of 2004 to the 2009 recession, vessel utilization was around 95% for the entire period. Correspondingly, on May 20th 2008 the BDI hit an all-time high of 11,793, only to see it lost by December 5th when it bottomed out at 665.  So why would the market react favorably to finishing above 900, which is akin to applauding a 12-minute mile at a world-class track meet? Demand Driven Business It is easy to look at the current orderbook with cautious optimism, following a dry bulk carrier buying binge that had all the restraint of a hot dog eating contest. But commodity demand is still the key. Seaborne shipments of bulk commodities have notched continually over a trillion metric tons per quarter since 2013, significantly higher than 800 billion plus tons a quarter back in 2010. 
Most 2017 forecasts have dry bulk capacity growing by just under 5% with demand – shipments – growing by 4.3%-4.5%. The forecast put supply and demand close to balance, enough to move the BDI upward but not enough for a real run. Many are expecting better in 2018. The London-based shipping consultant Drewry (whose forecasting tends to be more conservative) is forecasting dry cargo demand to grow by around 3% in 2018 – a figure that could be revised upwards with both China and India trending slightly ahead of expectations.  China’s economic growth is a big question mark. China’s demand for steel making commodities and exports of steel related products has been the linchpin in dry cargo shipping markets. In recent years, lower GDP growth and a concentration on improving the domestic economy has tempered demand forecasts.  That may be changing. China’s crude steel output rose by 5.7% year-on-year in June to a record 73.2 million tons, the fifteenth consecutive month of annual growth, according to China’s National Bureau of Statistics. This contributed to expansion of 4.6% in 1st half of 2017 steel output to 419.8 million tons, the highest 1st half total on record.  In another key steel-related metric is iron ore. China’s iron ore imports are also trending upwards. China imported 94.7 million tons in June, up on the 91.5 million tons imported in May. Through the first six months, imports rose to 539 million tons, 9.3% higher than the same period in 2016. Last year, China imported 1.024 billion tons and is on pace to easily eclipse that mark. The big winner in the China demand-game is Australia. Australia is forecast to ship 851 million tons this year, 885 million in 2018 and 897 million in 2019. The caveat to such heady forecasts is impact that today’s stockpiling will have on demand over the next few years. Ports are awash in iron ore and it is an open question of whether domestic demand in China will be strong enough to sustain utilization.  Contained within that question is China’s plans to cut down on excess steel capacity by 100 million tonnes over the next five years by shutting down illegal, sub-standard, steel-making operations. The same initiative could also apply to aluminum production, putting a damper on demand for raw materials. (see article on page 8). Finally, the role that renewables will play in the supply & demand scenario is simply unclear. Less demand as renewables play a larger role in the energy mix, but possibly more demand in other sectors for processed and semi-processed imports and exports. At present, there are reasons to be optimistic. China’s GDP expanded by 6.7% in the 2nd quarter of 2017, matching the first quarter and running above Beijing’s target of 6.5% for the year. Additionally, there are other positive signs, as China’s industrial output was reported up 7.6% in June against a year earlier, retail sales 11% and fixed-asset investments 8.6% for the same period. Don’t Forget India Understandably, China draws most of the attention from economic analysts but India could strongly influence the dry bulk market. London-based broker and analyst firm Clarkson’s noted, “While Australian and Brazilian exports are expected to be the key drivers of seaborne iron ore trade growth in 2017, shipments from elsewhere are projected to rise 11% to 250 million tons this year. This partly reflects a surge in Indian iron ore exports, which were almost fully eradicated by government policies by 2015.” One of the reasons for the turnabout is India plans to increase its thermal coal power generation to 236 GW in 2022 from the current 186 GW, an increase of 4% annually. As Drewry’s observed in their report, India’s coal production (Coal India) meets most of the country’s coal requirements. The nation has been increasing its output by 5.8% annually and the government has been making additional efforts to increase the country’s coal output even faster. According to reports, in order to produce 236 GW thermal coal power in 2022, India will require 159 million tonnes of imported coal. It is not just coal. Indian iron ore exports could also be on the rise. After establishing itself as a major iron ore exporter (especially to China), in July 2010 India’s government implemented a series of new mining restrictions and a 30% tariff on iron ore exports. As a result, Indian iron ore exports dramatically dropped from a peak of 116 million tons in 2009 to 4 million tons in 2015. But That Has Changed In February 2016, the Modi government cut the country’s iron ore export tariffs and several mining restrictions. India’s iron ore output increased 21% to 156 million tons in 2016, iron ore exports rose to 19 million tons. Through April India’s iron ore exports are already at 15 million tons and forecast to hit 37 million tons for the year. How much ore India exports in the future could be defined by global pricing and increased domestic demand for India’s steel making.