With steel production in some regions still lagging pre-pandemic levels, a rebound in manufacturing activity has led to shortages. These pockets of demand have turned to the seaborne market to fill the void, boosting bulk carrier demand.
Steel trade up
March was a strong month for most dry bulk trades, but flows of steel products were particularly impressive, helping to propel rates to ten-year highs. Last month we recorded 15.5m tonnes of steel goods loaded onto bulk carriers (excluding scrap steel), a 30% increase YoY and the highest monthly figure since AIS cargo tracking began. On a quarterly basis, this brings total volumes over the last three months to 38.5m tonnes, 25% higher YoY and also the highest quarterly volume on record.
The Supramax sector has been the prime beneficiary of this increase. Trade on these vessels grew by almost 60% YoY in March to 9.3m tonnes, while volumes on Handies remained flat YoY at 5.5m tonnes. Liftings of steel on Panamaxes, though limited, also grew by 19% YoY to 0.7m tonnes.
Pre-pandemic, these trades accounted for on average 7.2% of demand for the Supramaxes, but the recent jump in trade has boosted this figure to 10.7%, making it the third-most important commodity group to this sector last month (after grains and coal).
Manufacturing activity around the world has recovered from the pandemic far quicker than initially expected. This is likely down to the fact that the Covid crisis has hit the services economy far more than secondary industry, which has actually received a boost from increased demand for goods such as electronics and automobiles in some places. Manufacturing PMIs in the USA and the Eurozone, for example, have jumped by 2.0 and 7.3 points respectively since December 2020. Both indices are firmly above 50, indicating expansionary conditions for the industry while the Eurozone in particular saw operating conditions in March improve to the greatest extent on record.
These recoveries, combined with China’s stimulus impulse last year have helped to prop up global steel demand, but there is more to the surge in trade than just an increase in consumption. Global steel capacity was slashed in the early days of the pandemic as orders dried up, but now, even as demand has recovered, mills in some countries remain idled and production is tracking below 2019 levels.
In the US for example, steel output over the first two months of this year was still down by almost 10% YoY, and was 8% lower versus the same period in 2019. With domestic supply constrained, local steel prices have soared, fuelled further by infrastructure-heavy stimulus plans in the country. The result has been an arbitrage opportunity for exporters, who in March shipped the greatest volume of steel to the US on bulk carriers since 2015.
US steel imports in Q1 21 grew by 38% YoY, with growth coming in the form of Supramax cargoes from countries which did not heavily cut capacity during the pandemic, such as South Korea and Ukraine. Export-focused Japan also saw a boost in trade to US buyers, generating further long-haul business for the Supra fleet. With an average laden leg of around 30 days, the sharp rise in steel volumes into the US has played a significant role in the recent rally in freight rates.
In Europe we see a similar pattern, though shipments have been dampened somewhat by import restrictions. European steel output so far this year has lagged 2020 levels by 4% and is also down by 12% compared to the same period in 2019. Meanwhile, the sharp recovery in industrial activity has sparked shortages for manufacturers and a price surge. Imports last month were up by 13% YoY at almost 2m tonnes. Here again Supras have seen a boost in demand, but Handies have also enjoyed increased trade. Supramax and Handy steel shipments into Europe grew by 34% and 18% YoY respectively in March.
Nearby sellers in Turkey, Russia and Ukraine were the top suppliers for this market, but we also recorded an increase in longer-haul trades from China, Vietnam and South Africa, mostly made up of Supramax voyages. Imports however remain throttled by Europe’s quotas and anti-dumping duties. These will likely keep prices high, but they limit further upside for shipping demand.
Elsewhere, we also see areas of strong demand pulling in steel cargoes. Industrial activity in Southeast Asia and the Indian subcontinent has been resilient through the pandemic, boosting steel imports from other Asian countries. A jump in demand in Vietnam, Thailand, Indonesia and Bangladesh, for example, has helped to push Chinese exports to their highest levels since 2016. Purchases from these countries have also helped to lift South Korean exports to record levels.
All of these factors have added to tightness in the Pacific market where Supramax rates are currently double what they were at the start of the year.
Looking forward, we expect steel trade to remain elevated as long as certain regions struggle to regain lost output. This process will likely take a few months, provided industrial demand remains strong. Continued stimulus and a global recovery from Covid-19 is likely to sustain manufacturing activity, but the recent surge in cases in some countries presents a significant risk to this trend.
The IMF released its latest World Economic Outlook this week, and the fund’s fresh economic growth expectations show these diverging recovery paths. US GDP is now forecast to grow by 6.4% in 2021, a 3.3 percentage point improvement versus October 2020’s outlook. This is supportive of a broader recovery in steel consumption, but at the same time, the Euro Area’s 2021 forecast has been downgraded by 0.8 percentage points to 4.4%, owing to renewed restrictions to curb the virus’ spread. We will be detailing further how this updated economic outlook affects our view on the dry market in the coming weeks.