Ship in the fog

One of the worst years of the dry bulk industry is over. Will 2017 be better?

2016, which was one of the worst years in the history of the dry bulk market, is now over. 2017 has come but the market prospects for the coming months still remain unclear. Despite the fact that It is still very early in order to have the final economic data of 2016, we can make a review based on the latest projections which we expect to be very close to the final figures. Economic indexes which can be used to evaluate the shipping markets are: the world economic growth, the global steel production, the performance of the economy of China, who is a major importer of dry bulk products. These factors can affect the importing and exporting activity of the countries, while the expected newbuilding deliveries and the demolition activity affect the supply - the second indicator of the market equilibrium.

During 2016, according to IMF, the GDP slightly dropped to about 3.1% from 3.2% in 2015 however the fact that the Chinese economy has remained stable with a slight improvement (GDP from 6.5% in 2015 to 6.6% in 2016), little higher than the initial expectations, helped the dry bulk trade to finally slightly increase by about 1%. Though, it was not enough to keep the dry bulk market which dropped by about 6.7% (i.e. average BDI of 2016 as compared to the 2015 average) mainly due to the growth of supply which was more than twice the growth of the demand (about 2.4% supply growth vs about 1% demand growth). Therefore, some positive facts which occurred in 2016 like (a) the improving of the Chinese real estate sector which helped the iron ore trade grow by about 5%, (b) the restrictions in the Chinese coal production which boosted the imports and (c) the increased coal imports in other emerging markets of Asia, like India, did not help the market grow earlier than the last quarter of the year.

2017 remains foggy but with signs of recovery

All market indicators seem to be better in 2017, though the economic environment still remains foggy mainly due to the uncertainty in the Chinese and Indian economies and the relevant economic policies in these two countries. But let’s see the prospects in the main economic indexes and how they can affect shipping.

GDP: According to the latest projections of IMF, the World GDP is expected to grow by around 3.4% in 2017; the highest since 2014 when it hit the same rate. Both the advanced economies and the emerging markets are expected to experience a higher growth than in 2016. The highest improvement is expected to take place, between others, in USA, Russia, Canada, South Africa, the Latin America and the Caribbean, all of which with a major role in the seaborne dry bulk trade. India’s growth is also expected to be higher than in 2016 but its economy has been affected by the demonetization effect due to the recent governmental policies and the long terms impacts of this policy have not yet safely been evaluated; therefore, the overall economic environment of India still remains cloudy. On the other hand, a small slowdown is expected in China at a GDP of about 6.5%, down from the GDP of 6.7% that the country experienced in 2016. The below table summarizes the GDP of the major economies in 2016 and the IMF projections for 2017. GDP, on its own, does not seem to be a strong indicator of the shipping markets, however, the fact that there is a projection for 0.3% higher growth in the GDP after two consecutive years of slowdown gives a positive economic outlook which might have a positive feedback on the demand for shipping services.

Table 1: IMF Economic Outlook Projections (IMF, January 2017)

IMF Outlook for World GDP

Global Steel Production: Steel is produced by the use of iron ore, metallurgical (coking) coal, scrap and other minor ores. Therefore, a growth in the global steel production is very positive for the dry bulk industry since it boosts the imports of raw materials. Therefore, a high correlation exists between the BDI and the global production index as shown in the below graph for the years between 2013 and 2016.

Correlation between the BDI and the global production index (2013-2016)

If we analyze the global steel production data on a monthly basis, we will see that after a very bad H1 2016 the Global Steel Production has been recovered and there were some very positive signs during the Q4 2016 when the Steel production volume approached the 2014 levels. This recovery is expected to be maintained during 2017, also supported by the slight recovery of the world economy and especially the emerging countries. However, there are projections indicating that China (who is also the largest producer worldwide) might cut its steel production and/or reallocate part of same to cover domestic needs for 2017 which shall highly decrease its exports. In this case, the smaller sized bulkers (handysize and supramax) may be affected, though, on the other hand, it may result in an increase of the imports for coking coal from countries who now import steel products, if they decide to replace the imported steels with domestic (i.e. an increase of production).

Global steel production (2014-2016)

Chinese Economy: As it is well known, China plays a very important role in the dry bulk market as a major importer of iron ore and coal as well as an importer and exporter of various dry bulk products. Therefore, its economic activity, as well as its governmental policies, can highly affect shipping. The bad thing is that Chinese economy is expected to slightly slow down, though the government applies a number of new policies and increases public spending in order for the activity to remain stable and the economy to keep growing. Due to this, the recent projections of the IMF (January 2017) have been improved with 0.3% as compared with the previous projections in October 2016, when the IMF had projected a 6.2% for the Chinese GDP in 2017. Furthermore, due to such governmental policies which set specific restrictions on the working and output of the domestic coal mines, the seaborne imports have been increased recently close to 2014 levels but afterward those restrictions were eased by Beijing and a rebound of the domestic production was expected. One of the main facts which affected the Seaborne trade during 2015 and 2016 was the weakening coal imports of China that resulted in a drop of the global seaborne coal trade by almost 7% in 2015 and 2% in 2016 respectively. The coal market is the main segment that softened during these two years, therefore its recovery is expected to highly assist market, especially the bigger sizes which are utilized to ship these cargoes. However, the economic and politic environment remains very cloudy and any safe prediction, even short term, looks quite unsafe.

What is going to be the impact of these indicators on the demand?

The world dry bulk trade is expected to get improved by about 1% and reach a growth of about 2% during 2017 mainly driven by the growth in the trade of iron ore, grains and minor bulk cargoes. Iron ore trade is expected to grow by almost 4% mainly due to the increase in the Brazilian and Australian iron ore output and the increased importing activity of China as a result of the competitive international prices and the slow-down of its domestic production. The main risk here is that a potential cut in Chinese steel production might have an adverse effect on the Chinese imports of iron ore. On the other hand, coal trade, after two years of consecutive slowdown trade activity, may face a slight growth of about 1% mainly driven by the growth and the rising consumption in the developing countries (especially in the South East Asia), though the total coal trade will be highly affected by the governmental policies of India and China in regards to their domestic production, therefore the performance of the coal trade remains really cloudy. The minor bulk cargoes are expected to increase by about 2% mainly supported by a growth in the higher exports of bauxite and petcoke and the higher imports of cement, mainly supported by the higher USA demand. Another parameter which might help the market recover would be a potential lift of the export ban in Indonesia that would make its export of unprocessed dry bulk commodities to restart.

The demand indicators look promising. But what about supply?

The dry bulk fleet increased with about 2.2% in 2016, a lower rate than the 2.4% of 2015 however still higher than the expectations about 1 year ago. The freight market slightly improvement during the 2nd half of 2016 and this softened the demolition activity. Since the supply growth was still higher than the demand growth, we could see nothing more than a market softening. But what is going to happen within 2017? Recent market research indicates that the expected growth of supply during 2017 will be lower than 2016, standing at about 1.5% - 1.8% and the final figure will depend mainly on the demolition activity, the slippage of new deliveries and cancellations, all of which are usually elastic to the freight market. In any case, the fleet orderbook is now much healthier standing at 11.2% of the world fleet, much lower than the about 20% of 1 year earlier.

After all, how is 2017 going to be for shipping?

The following graph shows that the drop of the BDI has been increased as soon as the gap between the growth of supply and the growth of demand became higher in favor of the supply. However, it now seems that the demand is expected to gradually increase due to the higher growth of the world economy, the increase in the steel production output, the potential stability in the growth of the Chinese economy (due to the increase of public spending and investments which can avoid the previously projected slowdown) while, on the other hand, the supply is slowing down due to the much smaller orderbook. Therefore, the shipping market dynamics now seem healthier and we expect that the trend of the market during 2017 will remain about same as the market during the H2 2016 with some volatility related to market seasonality and congestion (which affects the short term supply). Though, the economic environment remains rather unclear and sensitive to the performance and governmental policies mainly of China, therefore a new policy during the year may affect the short-term market dynamics. However, after a long time, the overall prospects seem to be slightly optimistic.

Graph with the BDI vs the growth of supply and demand

Regardless of the direction of the dry bulk market, OpenSea platform can support ship chartering managers in looking for the best-matching cargoes and ships. Because of the high volatility and the overall market uncertainty, OpenSea can become an established source for new clients, especially in voyage charters, no matter the size and type of cargoes/ships.

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