Can a rise in steel production in China spark life into the dry bulk sector?
There is little doubt that China’s become the world’s blast furnace, pouring out steel at historic rates. With the ink hardly dry on a $157 billion stimulus package to rebuild the PRC’s infrastructure, there is some cause for optimism in the dry bulk sector as nothing fills bottoms quite like steelmaking.
It doesn’t matter how you view the charts, daily, monthly, yearly or even further back, the BDI (Baltic Dry Index) which measures the performance of dry bulk shipping has been moribund to the point that a flounder bumping along the bottom looking for a meal is higher in the water column.
Over the last year (52-weeks) the BDI has been as high as 1,930 and as low as 647 (at this writing it is a touch over 965). For comparison, those who can remember the days before the great recession, in May of 2008 the BDI topped 11,620. In May of this year the BDI approached 1,150, or over 10,000 points lower than the pre-recession highs. Like other sectors, there are too many ships, chasing too few cargos. Additions have come faster than deletions, all adding up to a bumpy ride along the bottom.
China: Blast Furnace To The World
The key to recovery for the dry cargo sector is steel production. Steel and steel producing commodities and products are the largest employer of dry bulk ships, accounting for nearly half of the dry bulk tonnage. The ocean borne transport of coal and iron ore for the furnaces, scrap steel and eventually steel products, eats up ton-miles and lifts the dry cargo sector.
It has been often written that China’s the world’s workshop, but in reality the Middle Kingdom is the blast furnace to the world. China is easily the world’s largest producer of crude steel. In 2011, China produced nearly 684 million tonnes of crude steel up around 7% over 2010.
To put this total in perspective, it would take the EU (27) and the next eight producers to equal China’s production (Japan is second 107.6 MT, and the US 86.4 MT is next).
The shift of steelmaking to China is a fairly recent economic phenomenon. In 2001, China’s steel production accounted for just under 18% of the world total with the EU (27) taking a 22% slice and Japan a little over 12% of the steel production. By 2011, China accounted for over 45%, the EU (27) just under 12% and Japan 7% of the world’s crude steel production. According to figures released this month by the US Department of Commerce China’s share of crude steel making is steel rising and now stands at 47%.
The rapid rise of the steel sector in China was based on urbanization, and double digit GDP growth fueled by exports. Recently the economy is set to grow at between 7.5%-7.7%, far below the rates that fired the rapid growth in steel production. Nevertheless, production has continued to rise which has promoted concerns that the growth is unsustainable or at least economically unviable leading to the question of dumping on steel exports. In many cases the steel mills are outdated, but easy access to capital and local interest is keeping employment up. Tax revenues flowing creates another dynamic.
In September, the PRC announced a massive $157 billion infrastructure program that includes the construction of 25 new subway lines, 13 new highway projects and a number of other large-scale transportation related projects, urban-rail initiatives, energy production and waste-water treatment plants. The stimulus plan, along with the goal of doubling the per capita GDP by 2020, will increase steel demand in China.
King Coal and the princelings
To produce these vast quantities of steel, China imports more steelmaking raw materials than any other nation. It’s a little hard to believe that up until 2009, China was a net exporter of coal. But three developments changed China from being an exporter to an importer in a very short period of time: the rapid increase in domestic steel production, the huge increase in electric demand and the closing of many smaller inefficient mines.
In 2011, China imported around 182 MT of coal, up nearl
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