The week started with a lot of doom and gloom, and a fair amount of fear (and loathing) stalking the dry bulk market. Various market reports and commentary had been predicting a slowdown, supporting their arguments with whatever came to hand. Among the usual suspects were:

IRON AND STEEL The price of iron ore has fallen precipitously apparently because steel output is falling: a 12% drop in August, the greatest year on year fall since the financial crisis, and in absolute terms the greatest ever. Capacity cuts which were promised by the Chinese authorities now seem to be taking effect. Emission control is taking over, especially in the run up to the end of the year. The capesize market is looking good though.

COMMODITY PRICES Not the same as above, please don’t get confused. As I may have mentioned before, commodity prices and the movement thereof have no relationship with volumes of cargo shifted. However people like numbers, so bearish commodity reports from banks and analysts cannot really be used to predict the end of the dry bulk party. I say cannot, but people continue to do so, for reasons of their own.

ENVIRONMENTAL REGULATIONS This tune keeps playing again and again. Coal is dirty and nasty and we must all stop using it, apparently, and this will mean an eventual collapse in the freight market. When exactly this will happen is not clear.

CONGESTION This tends to be an argument used by charterers to try and keep the shipowners’ dreams of everlasting riches at bay. The argument goes something like this: all this congestion will unwind sooner or later, and then fleet supply will increase and the freight market will tank. I think they have a small point, but too small to be of any help in reducing period rates. Congestion normally occurs at two places, at least in dry bulk shipping: at the port of loading, and at the port of discharge. (Thankfully the sea is wide enough for traffic not to be a problem elsewhere, except in canals of course.) Loading port congestion is caused by demand for cargo to be exported, but for one reason or another, the cargo cannot be loaded quickly enough to fill the ships that are waiting. A lot of times it is ironically enough the charterers themselves who are behind at least some of this congestion, booking ships so that they can join their place in the queue as early as possible. It could be argued therefore that charterers have it in their hands to unwind congestion, and decrease freight rates to their own advantage, but funnily enough they seem reluctant to do so. On the other hand, discharge port congestion is usually caused by a lack of ability or desire to get the stuff of ships. This could be due to a lack of equipment, a lack of space ashore, or simply to teach some naughty Australian cargoes a lesson. Either way, it does not appear to me that congestion is something that will magically unwind any time soon.

HOUSING IN CHINA Otherwise known as Evergrande, the word, or company on everyone’s lips, but whether this was because it represented the end of private property investment in China, or the start of a Lehmann Brothers moment, or a slowdown in growth, or contagion into the wider global markets, or just a crisis in the Chinese banking system, or another step towards the PRC dominating all of public and private life in China, or indeed all of the above, none of the above, or mix-and-match depends on who you are talking to. But whatever it was it was bad news.

 

Except it wasn’t. As the week fades into the sunset, the freight market is higher, much higher as far as the capes are concerned, and demand for ships, for period or for purchase, remains strong.

The problem with using one story (or even a combination of stories) to predict the market, is that your stories, very vivid and colourful, or powerful and persuasive, remain just that, stories, with little relevance to the case in point.

Iron and steel production maybe falling, and iron ore prices may be falling, but the freight rates continue to rise. This huge fall in steel production (and iron ore prices) came against the background of pretty good freight markets. Except, the iron ore price is still over double what it was in 2016, and as CRU point out:

Although Chinese steel production dropped in July and August by 8% and 12% respectively, it is still up 5% in the year to date on 2020…

They go on to argue that this means that there is more production to cut before the end of the year, but this does not explain the demand for iron ore in the meantime.

And whilst we’re on the subject, the price for coking coal, the stuff used in the iron and steel production process, is rising. “Aha!” you may say, “that is because there is a lack of supply, especially as Australian coal of any sort is no longer welcome in China. When supply falls, prices go up. Doh!” or whatever it is people say when you’re being stupid. I will not labour the point except to mention that demand for thermal coal is up too (even though Chinese domestic production is up 5% in the first part of the year), perhaps because electricity produced by thermal power generation was up almost 15%. And that all this coal (because of China’s issues with Australia) has to come in smaller ships. But did I mention that cape rates are rocketing? Confusing isn’t it?

Evergrande however dominated most of the chat this week, and the worry that China’s biggest property developer was about to default on all their debts, and suck shipping, China, the global banking sector, everything down a black hole. The FFA market on Monday certainly thought so, with steep falls in all sizes, routes and periods. Which turned around to steep rises the next day. That exactly the same thing happened in the stock markets probably illustrates something about the interconnected-ness of news, or the disconnect between traders of ‘paper’ and real life, but I can’t really put my finger on it, because unlike them, I don’t know everything.

If you think I am just being bitter because I don’t get invited to the same flash parties they do, consider the following from Tom Price of Liberum on the effect of a China real estate crunch might mean on commodities:

bearish commodities? Yes

looking narrowly at the direct/first-round impac on commodities, this event threatens a slowdown in China’s property sector – 1-of-2 very large, broad based commodity consuming sectors of this economy (i.e. the other = infra[structure])

it’s generally well known (among resource sector investors, at least) that China’s share of global commodities consumption = 40-70%

 but what share of global consumption is China’s property sector? Of China’s total commodity supply, its property sector consumes:

40% of steel flow (380Mtpa = 20% of global total);

20% of copper (2.7Mtpa = 20% of global)

15% of aluminium (6Mtpa = 9% of global)

15% zinc (0.7Mtpa) = 5% of global)

10% nickel (0.2Mtpa = 8% of global)

ANSWER: China property = 5-20% of global commodity supply. -so yes Evergrande’s potentially a big deal to Commodity World.

I think that Mr Price wrote this on a Monday morning after a heavy weekend, on the tube, in a hurry, if the punctuation, language, and broad bush assumptions are anything to go by. A few things sprang to my mind on reading this:

–         Resource sector investors must be a pretty vague and inaccurate bunch, if it is well known that China’s share of global commodities is 40-70%. I assume he means it varies between some commodities and others, but as we know some commodities are different (price, amounts, use) than others, but maybe he doesn’t

–         Does China consume 100% of the world’s copper? I hope someone told BMW

–         Will all housebuilding and other domestic construction stop in China if Evergrande defaults? I sincerely doubt it

–         I accept that economic growth in China may be affected, but that does not mean it is the end of the world as we know it

 

To draw a line under Evergrande as an existentialist threat to the dry bulk market in the form of a full blown banking crisis, this is from Wolf Richter, of the Wolf Street Report:

…China has some unique tools to ward off a classic financial crisis.

The government controls nearly everything, including the central bank, the big four state-owned commercial banks which are the largest in the world., the bad-banks which absorb the bad loans, big asset managers, and most of the largest companies, and much of the media, including the social media, specifically with regard to financial stories.

In other words, the government controls the money, the lenders, the borrowers, the buyers, the markets, and the message.

We in shipping know this already: history may not repeat itself, but it rhymes, as government led stimuli and controls, and pushing and pulling, moulding and trimming, over the last forty odd years has led to spikes and troughs in our market. China’s story is the legitimacy of the Party; the Party will not do anything that will threaten its existence. Ironically, this is good, for now at least, for tramp dry bulk shipping.

All of the stories I started this article with have not, and will not, bring about a fall in the dry market any time soon. Maybe some of those stories may induce some shipowners to sell, or at least think about it? Who can say? But for me, the only story in town is not even a story, it’s two facts proven by the continuing rise of the physical freight market, one that for once this week dragged the derivatives along, and not the other way round. What are these facts? The supply of ships, and tonne-mile demand. The are subsequent facts to this – the demand for ships on period to cover expected positions, hedged by FFAs, the demand for new ships in the secondhand market, and newbuildings of course – but until the two basic facts alter, nothing much will change. It’s great until something all (or most) of us cannot see that may upset everything. But despite all the moaning and groaning and wringing of hands, this week Friday is better than Monday, which is how life should always be.

 

Simon Ward