25-05-2021 China’s signal to speculators may well support dry bulk freight rates, By Nidaa Bakhsh, Lloyd’s List
China’s recent comments aimed at bringing down super-hot commodities prices may turn out to be a blessing for the dry bulk market. Remarks by the National Development and Reform Commission was seen as a warning to those taking large positions in the paper market for commodities ranging from iron ore to copper and steel, which had seen a bull run to record highs over recent weeks, according to Shipping Strategy. The signal to market participants “do not stop people from trading the physical, but rather to curtail volumes from the futures market, the effect of which may be to encourage people to buy more imported commodities, which will help push up freight rates,” the UK-based consultancy’s founder Mark Williams said.
While May has been a quiet month due to various holidays around the world, June and July may “roar back,” he said, adding that the second half of the year will turn out to be busier. The Baltic Dry Index could even breach 4,000 points, the first time in more than a decade, according to Mr Williams.
US-based Breakwave Advisors said the biggest risk to the dry bulk rally is China’s intervention to cool the markets. The capesize segment appears to be “the least supportive and the most vulnerable” to China’s clampdown on sky-high commodity prices, relating mostly to its steel industry, which has seen sharp increases this year, it said. With more than 60% of demand coming from China, dry bulk remains highly dependent on the country’s imports, and any indication of a pullback will filter through to the dry bulk market in the first instance, it added.
“We do not believe that such an aggressive action will be beneficial for China, as prices will only increase further due to the limits in domestic production capacity for a lot of commodities. However, we cannot ignore such a scenario.” Global steel production rose 23% to almost 170m tonnes in April versus the same month last year, according to the latest statistics from the World Steel Association. China’s output increased by 13% to almost 98m tonnes.
Peter Sand, chief shipping analyst at the largest shipping association BIMCO, said commodities were feeling the pressure of inflation from extreme expansionary monetary easing, particularly in the US. “Higher commodity prices do not help anyone but the miners,” he said, although they cannot benefit hugely from the red-hot markets due to some supply constraints. The higher prices are not currently correlating to super-charged demand, he noted. Take iron ore, for example, which reached record high levels of more than $230 per tonne on the futures market, not because demand was strong, but because of lower availability.
There were also concerns of souring relations between China and its main supplier Australia. In terms of coal, Chinese electricity production from coal is higher at present, which bodes well for demand at least in the short-term, Mr Sand said. There may be less imports over time as domestic production rises and more renewables make up the share, which would be negative for the panamax and capesize demand, he added.