With summer now well underway, the dry bulk market is primed for much needed support, in the form of China’s need to replenish lower iron ore stocks, which is further boosted by low iron ore prices. In its latest weekly report, shipbroker Intermodal said that “looking at BDI’s current performance, we can all agree that the second quarter results remain disappointing. As we enter the final month of the Q2, there are some optimistic demand fundamentals that could improve sentiment over the summer months. Our focus will be on the revival of Chinese iron ore demand and why we believe such an event could occur in the near future. While iron ore is the main ingredient of steel production, Chinese iron ore imports are not only driven by the global demand for steel but also by the price of iron ore itself. When the prices are low and inventories are also low, demand tends to increase, supporting the utilization of both the Capesize and Kamsarmax vessels. Currently, iron ore prices have fallen to a 5-month lows amid concerns over the Chinese economic recovery, however, we’ll explain why this could also lead to an increase in iron ore imports in the near future, as it’s possible that Chinese buyers to import more than they need, opting to build up stocks”.
According to Intermodal’s Mr. Yiannis Parganas, Head of the Research Department, “starting with Chinese iron ore stocks the current level of 126m tonnes is below the 5-year average of 134.6m tonnes. Given the historical analysis, June tends to see lower ytd levels of iron ore stocks, following the traditional peak construction season in March-May, which draws down iron ore stocks for steel production. Chinese demand for iron ore then picks up, pulling stocks back to higher levels, with February typically being the peak month in terms of stock levels. Furthermore, as iron ore inventories act as a safety net between iron ore supply and steel mill production, we can see that over the past three years, the 124m level has tended to be the lowest point. We also know that iron ore inventories increase when iron ore prices fall and vice versa. In February 2023, the iron ore price (SGX TSI 62%) surpassed the $130/t mark amid growing steel demand following the end of Covid-19 restrictions. In March 2023, Chinese steel production reached 95.7 million tonnes, +16% m-o-m. The need for steel production during this period was also reflected in iron ore imports, which rose to 100.2m tonnes in March, the highest level since November 2021. Since then, however, both steel production and iron ore imports have fallen, with April data standing at 92.6m and 90.44m (a 10-month low) respectively. Strong steel production has been supported by drawing down iron ore stocks rather than increasing iron ore imports, leading to the current falling iron ore inventories. The decline in iron ore demand was also reflected in falling iron ore prices, which fell below $100/t.” he noted.
Meanwhile, “looking at the steel production, the question is if demand could lead to healthy output thus supporting iron ore imports. We believe that output will remain subdued ahead of the summer months, when Chinese construction typically slows as high temperatures and heavy rain in the south hinder outdoor activity, however from September onward production could find support when the weather will be more conducive to construction and numerous economic stimulus measures in place since late last year will begin to influence the real estate market. However, the overall outlook with respect to steel demand is weak which means that the aforementioned spike will be short-lived with its volume unable to support the freight market by itself. Indeed, steel demand remains subdued which is evident in both HRC and Rebar prices (HRB400 20mm spot price hit its lowest level since April 2020) which leads to only a third of the country’s mills operating at a profit today. In addition, according to the NBS, January-April investment in the property sector (the key sector for steel usage) declined by 6.2% y-o-y. The declining steel prices have led Chinese authorities to consider an official target of lowering steel output by 2.5% in 2023. While this measure has yet to be confirmed, in the scenario that steel production in 2023 does not exceed the previous year’s level, the average monthly production for the rest of the year would be below 82.3m tonnes”, Mr. Parganas said.
“In summary, while Chinese steel production will remain constrained for the rest of the year, with a brief pick-up likely in September, the combination of weak iron ore prices and low iron ore stocks may encourage Chinese buyers to import over the summer. This will coincide with the traditional stronger period of Brazilian iron exports in August, providing the much needed support to both Capesize and Kamsarmax freight market momentum”, Intermodal’s analyst concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide