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How Does China Do It? And What is That Doing to Dry Bulk Freight Markets?

While the rest of the world struggles with the economic disruption caused by coronavirus, China posts record output numbers.

The official industrial production index, which focuses on larger entities, grew by 5.6% year on year in August, including a 1.6% increase in mining output, 6% increase in manufacturing output, and 3.3% growth in textile output.

China’s August crude steel output was up 1.6% month on month and up 8.4% year on year, hitting a monolithic 94.85 Mn Tonnes. Aluminium output in August was up 2.3% month on month and 5.5% up year on year at 3.17 Mn T.

Steel output grew even as blast furnace profitability fell due to higher input costs, with FOB iron prices peaking at over USD 120 / T for 62% Fe Australian Fines. Even so, Chinese port inventories of the red ore rose to a five-month high in mid-September of 110 Mn T, still some way off their November 2019 peak of 128 Mn T. Iron ore imports were up 9% year on year in 1H20 in the teeth of the Coronavirus pandemic and are set to grow further during the balance of the year.

As Q3 fades into Q4, more Brazilian iron ore is finding its way onto the international market. This is good news for Chinese buyers as iron ore prices are falling (though a rout is unlikely) and shipping costs remain proportionally low. It’s also good news for Capesize owners. Data from Mysteel suggest that Brazilian iron ore stocks in Chinese ports have risen from 20 to 30 Mn T tonnes between June and September while Australian-sourced ore inventories have fallen from about 70 to 57 Mn T over the same period. Keep it up, Brazil, and the Capesize sector will enjoy Q4 this year.

In 2019 when Brazil’s exports were affected by the Brumadinho mining dam collapse, China turned to second-tier iron ore producers to replace lost cargoes from Brazil. Russia, Saudi Arabia, Iran, Turkey, Sweden, Canada and South Africa benefited, as did owners of Panamax and larger geared tonnage as Capesizes were too large to fit into many of the load ports in these export nations. If China continues to grow its iron ore imports beyond Brazil’s current capacity to export, then we could see more exports from these nations again.

It’s a different story for coal, and another example of how governments influence markets. China’s electricity production grew 6.8% year on year in August to 723.8 Bn kilowatt hours. Thermal coal-generated electricity output was up 6.2% year on year but was down 0.7% month on month. Solar was up 2.1% year on year but down 0.1% month on month. Hydro-electric was up 8.9% year on year and up 2.8% month on month. Nuclear was up 0.9% annually but down 5.8% month on month, and wind was up 18.7% annually and down 4.5% month on month.

The overall story for electricity generation in China is that coal’s share of primary energy sources is declining. From a peak of over 72% of electricity production, coal now represents perhaps 56% of source material. Since China removed subsidies from solar, wind power has grown faster. Natural gas imports continue to grow, rising 12% year on year, or by 9.4 Mn T in August to 65.1 Mn T for the year to date, up 3.3% on January to August 2019.

Coal’s share is falling, but coal production is steady and still massive, at 330 Mn T just for August, down 0.1% year on year and 3.6% month on month. For the year to end-August, coal production was 2.45 Bn T, also down 0.1% year on year. However, the government continues to favour domestic thermal coal over imports, imposing import quotas which are controlled by the big state owned generators and steel producers who still use plenty of thermal coal as well as coking coal. Total coal imports were 20.66 Mn T in August, down 5.44 Mn T on July and down 37.3% year on year. For January to August, total coal imports were 220 Mn T, up just 0.2% year on year, which is a difference mainly based on congestion rather than a trend in bilateral trade and reflects discipline in applying import quotas.

China’s sanctioning of Australian coal imports was an easy political win given that the country can produce so much coal domestically. But it hasn’t helped Indonesia either. The SE Asian giant is selling more coal to India, with some evidence that more is going in geared Ultramaxes, preferred in India for their self-unloading capability.

State control of the Chinese economy, especially via support for the steel industry, should have a positive effect on iron ore freight markets as 2020 draws to a close. There’s not so much good news for the coal shipping markets though. Support for domestic mining employment trumps quality and price considerations on imports.

Longer term, one wonders how long China can keep priming the economy with urbanisation projects to consume all that steel (it isn’t being exported; China has become a net steel importer again this year). One also wonders if China’s plans to expand coal-fired electricity production may be coming to an end in favour of gas and renewables. It is possible that policies to address climate change will be central to the 14th Five Year Plan for the years 2021-25.

Work on these plans goes on constantly, but the process of writing this one down will begin at the fifth plenary session of the 19th CPC Central Committee to be held in Beijing in October 2020. The centrepiece of that plan will be the development of Chinese-owned high-tech industries to avoid growth being stifled by foreign powers withholding their own technologies. The environment may therefore take a back seat to the Made in China 2025 programme. But the dry bulk shipping industry will be keen to know if plans are afoot to accelerate the decarbonisation of China’s economy. The Chinese government has demonstrated time and time again its ability to alter policy at the drop of a hat, regardless of the effects on freight markets.

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