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Why China’s solid crude steel production helps dry bulk shippers

Xun Yao Chen

Dry bulk shipping indicators, October 18 to 24 (Part 6 of 9)

(Continued from Part 5)

China’s crude steel production

China produces roughly 50% of the world’s total crude steel. As steel production requires iron ore and coking coal, and China relies more and more on imported raw materials, China’s steel output is a critical fundamental indicator that affects how much traders will import. During the first quarter of 2013, China’s imports of iron ore made up ~75% of total iron ore shipments. Notably, crude steel production data can have a significant effect on trade volumes, demand for dry bulk ships, and shipping rates.

China Crude Steel Production 2013-10-24

September output year-over-year remains solid

In September, we continued to see solid year-over-year growth in China’s crude steel output. The national Bureau of Statistics of China reported steel output of 65.4 million mt (metric tonnes). While output fell slightly from August’s 66.3 million mt, it remains significantly above 58.0 million mt registered for September 2012. Year-over-year growth was unchanged, at 12.90% from last month.

The government won’t miss its target

Earlier in the year, investors were worried about the new government’s tolerance for lower economic growth to give it an opportunity to craft and implement reforms. But as growth fell to 7.5% during the second quarter of this year, the government stepped up public projects and rolled out tax cuts for small companies in order to stabilize growth and meet its target of 7.5% set for this year. China recently released its GDP growth for the third quarter, which rose to 7.8%.

The situation isn’t like 2011, and reforms are underway

September’s data shows that China’s industrial activity won’t likely decline from near 20% to 0%, as we saw in 2011, when inflation was soaring.

Even though the new Chinese government is still fixated on changing the fundamental structure of China’s economy to a more consumption-based model, we know it’s careful not to let economic growth fall drastically and halt growth momentum. Besides, urbanization should continue to drive demand for steel in the long run and we’re already seeing moves in Shanghai’s free trade zone and liberalization of interest rates.

Connection to dry bulk shippers

As long as growth momentum doesn’t fall below 5%—near the lows of mid-2012, when industrial output also bottomed—steel output data should support iron ore demand and dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB). Of course, the higher the steel output, the more positive it is for dry bulk shippers.

Continue to Part 7

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