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Iron ore import growth fell in June, but outlook positive for dry bulk stocks

Xun Yao Chen, Industrials Analyst

Importance of iron ore import

China iron ore import volume is an important indicator that affects shipping rates. While import data is published a few weeks after each month has ended, it nonetheless reflects China’s economic health. When iron ore import growth is solid, generally, steel production growth remains high. Since higher iron ore import means more demand, shipping rates will rise, which is positive for dry bulk companies that haul key dry bulk materials such as iron ore, coal and grain across the ocean.

Is lower growth worrisome?

Iron ore imports fell from May in June, falling from 68.56 million tonnes, which was a record high in 2013, to 62.3 million tonnes. On an annual basis, iron ore import growth fell from 7.39% in May to 6.84%. Based on the last six months of data, iron ore import grew 5.74% year-over-year—which is not too bad considering the last six months of growth came in at just 4.35% and 4.92% during March and April this year.

Iron ore imports rose in April and May, as traders took advantage of falling iron ore prices, which led to an increase in iron ores held at Chinese ports. But the declines we saw in prices of iron ore and import volume in June point out the fact that demand has weakened since the beginning of the year. Given the Chinese government’s tolerance for lower economic growth, which just came in at 7.5% for the second quarter (most likely rigged), investors may be worried whether growth will slow down further. There are three possible cases.

  1. China’s economic growth will slow drastically, and we’ll see iron ore imports slow drastically if the government mishandles its tolerance for lower economic growth.
  2. If growth does fall below 7.5%, the government will step in to meet its annual target growth of 7.5%, balancing both short-term and long-term growth.
  3. China’s economic growth will continue to grow at current levels.

Current situation and outlook

So far, we’ve yet seen signs of a substantial decline in growth, with industrial output, real estate activity, and car sales showing signs of support (see our Macro Trend Page), which puts us in situation 3. While China’s slowdown was a concern at the beginning of the year—which has negatively affected several industrial stocks—now that economic growth has fallen to just 7.5% (the target the government set for this year), much of the short-term downside may have priced in. If economic growth slows further, the Chinese government might energize the economy to meet its annual target of 7.5%. This is positive for dry bulk shipping stocks such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE), Navios Maritime Partners LP (NMM), and Safe Bulkers Inc. (SB), because it means iron ore import growth will likely continue at its current level.

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