The Sun Shines in the East, Invigorating Dry Cargo Demand – A Review of 2016 Trade Patterns

March is a good month to look back at customs trade data and see how the dry cargo market performed in the previous year. The largest trading countries have published their December monthly data. We now have a clear picture about what went on. Compared to the stagnation in 2015, we see a 3% rise in dry cargo demand across the globe. Tonne mile trade grew at the same rate of 3%, indicating no real change in overall voyage lengths.

Shipping Demand Grew in Asia During 2016

Asia is the place where most of the growth happened, accounting for 67% of global demand. Intra Asia trade grew by 5% while trade into Asia grew by 4%. Contrast this with Europe where intra and extra trade fell by 2% and 3% respectively. Within Asia, predictably, China was the main reason for cheer with sizable increases in iron ore and coal volumes.

Also worth noting is the growth in intra Asia trade to the Philippines. Their imports of dry cargo have risen 70% from 19 million tonnes to 32 million tonnes in just one year. This accounts for 26% of all intra Asia trade growth. The main cargoes responsible for this rise were cement which doubled to 6 million tonnes, steam coal which rose from 9 million tonnes to 16 million tonnes and equally amazing progress in the steel groups. The Philippines economy expanded 6.8% last year which is ahead of China (6.7%).

 

Iron Ore and Steel Trade Stronger Than Expected

Iron ore and coal collectively make up approximately 50% of dry cargo trade. So how did they fair? The answer is better than expected. Chinese steel production fell in 2015, for first time since the country entered the WTO. Therefore we expected another fall in 2016, as commentators believe China’s economy entered a new phase. However, there was marginal growth from 803 to 808 million tonnes. This coupled with the stimulus of rising iron prices throughout 2016 has led to a 5% growth in global iron ore trade. To give you an idea of the influence of China, if we strip out Chinese iron ore imports then the global traded volume fell by 2%.

China’s spare steel requirement led to a dumping of steel across the world. In 2013 they exported 32 million tonnes. By 2016 they have shifted 57 million tonnes. Over this period steel demand did not grow globally, although tonne miles grew by 3%, as Chinese steel was received at bargain prices. The knock on effect is the less cost effective smelter across Europe has been mothballed until the Chinese steel capacity re-balances during their transitioning economy.

Steel tubes continue to show much weakness due to the relatively low oil price. Oil companies struggle to justify Return on Investment for oil and gas exploration projects and subsequently steel tube trade has fallen. In 2012, 42 million tonnes was shipped globally which is now down 22% to 32.7 million tonnes.

A Still Year for Coal Imports

Coal Trades Provided Little Excitement

Coal trade declined slightly overall. The trade was propped up by coking coal volumes, which were up 5% in line with the iron ore trade. Steam coal fell by 3% in terms of volume and 4% in terms of tonne mile. China which accounts for 18% of global coal trade had negative growth for the first half of the year which turned around as domestic mines cut production. Russian steam coal exports have made great strides over the past 5 years sending approximately 100 million tonnes in 2010, growing to 159 million in 2016. Their market is mainly short sea to South Korea and Japan. This part explains the tonne mile decline as Australian volumes come off the boil and volumes are replaced by Indonesia too.

 

Grain Trade is at an All Time High

The grain season has been exceptionally good in the 2016/2017 season. Both the IGU (International Grains Council) and USDA (US Department for Agriculture) expect cereal production to set a new all time record in quantity. The cargo trade data in our agriculture group show a 3% rise in 2016 with wheat, sugar and soya bean being the main contributors at +9%, +7% and +7% respectively. The agricultural sector was also enlarged with China’s appetite for Soya bean. Demand rose by 10 million tonnes per year for the last two years and comes on the back of an impressive decade of growth.

China’s third largest grain import is now surprisingly Sorghum. Relatively unknown until recently, this ancient grain from the dry African plains has grown in popularity in the United States. It’s drought resistant, highly nutritious, gluten free and is seen as less boring than quinoa, so is increasingly appearing on the menu. It now accounts for 8% of all Chinese agricultural imports. Chinese imports from the United States went from zero in 2012 to over 9 million tonnes in 2015.  Volumes have dropped back to 7 million tonnes in 2016 although is it’s definitely a cargo to put on the watch list.

Sorghum has taken off in the United States

 

Forestry Trade Being Questioned

The forestry sector also expanded. Wood pellets have been spoken about extensively by commentators as the United Kingdom has led the way in converting coal power stations to accept them. The upward trend looks to continue as the European commission approved a third unit of a Drax coal power station to switch to wood pellets in December last year. However, a new report by Chatham House out recently suggests burning wood pellets releases more emission than coal, and questions the current UK government subsidy. Nevertheless the UK imported 7.6 million tonnes in 2016 up from 6.5 million in 2015. Another country to further embrace wood pellets in 2016 is South Korea, imported 2.3 million tonnes, up from 1.4 million tonnes the year before.

 

What will happen to Dry Cargo Trade this year?

Overall we can say dry cargo demand came from unexpected areas in 2016. The drivers for growth continue to appear in the east while the west struggled to ride economic cycles. The major storm of 2016 came in the way of political events in Europe and the US. This will rumble on for a long time as protectionist ideology will start to reshape global trade flows. The irony is the east is continuing to embrace free trade and capitalist values while the West is questioning their merits. 2017 promises to be an interesting year in global co-operation.

Chinese premier ,Li Keqiang, has renewed his country’s commitment to tackle pollution during his annual congress speech. He unveiled a series of measures including cutting coal use and upgrading coal-fired power plants. Theses commitments could have a negative impact for dry cargo demand, if they play out, albeit a positive step forward for the environment.

A potential negative influence for the grain trade this year is further outbreaks of Avian bird flu. It reached Europe in October 2016 and there was recently an outbreak in Tennessee in a Chicken breading operation. The area is right next to one of the largest poultry producing areas in the States.

We expect any growth from 2017 to come from Asia and specifically intra Asian trade. As with last year, the swing factor will be how China behaves. Their structuring of energy requirements and their steel industry production capacity continues to be the dominant force in dry cargo trade.

Written by Russell Thompson


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