High iron ore inventories at Chinese ports and uncertainty in the global economy are putting the demand for Capesizes at risk. Drewry believes that demand for Capesizes in 2019 will be proportional to iron ore inventories at Chinese ports. Despite the fact that Chinese steel production will increase in 2019, a further reduction in iron ore inventories could negatively affect the demand for dry bulk vessels.
As Rahul Sharan, Lead Research Analyst, Dry Bulk informs that in 2018, China’s iron ore imports decreased 1.8% year on year, even though the country’s steel production increased. In addition, while China’s consumption of imported iron ore grew in 2018 in comparison to 2017, imports were less as steel mills preferred to drawdown on port inventories.
Because of this the question of how will China’s inventory story unfold in the near future arises. Answering this, Drewry expects two opposite forces to be working in the background.
At first, China’s push for infrastructure and easing in monetary policy will continue to boost the demand for steel in the country. What is more, since the government is committed to the clean air initiative, its steel sector will remain under scrutiny for emissions. This will drive the demand for high quality ore, mainly met by imports. This will help the dry bulk sector, and underpin imports.
There is also the possibility of low inventories, as trade friction with the US will continue for some time. In the meantime, China’s economy grew by 6.6% in 2018, which is the slowest growth in the last 28 years, with the IMF projecting growth to reduce to 6.2% in 2019 and 2020. If this scenario happens, sentiment will be weak and steel mills will remain cautious on future steel demand. These facts will make millers continue to draw on port inventories.
Finally, in 2018, average quarter-on-quarter decline in inventories was around seven million tonnes and Drewry assumes that in first-half 2019 inventories will keep reducing at the same pace. Moreover, the majority of the decline in inventories will be a substitution for imports from Brazil, due to the fact that Brazilian export capacity has been reduced because of the recent dam burst.
In short, we think the prospect of strong iron ore import growth in China in 2019 is low and for that reason Capesize demand is under threat
Rahul Sharan concludes.