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Coronavirus: Shock to recovery for the Dry Bulk market

The Coronavirus and the expanded lockdown measures are expected to delay the restart of steel mills and construction sites in China, beyond the prolonged new year holiday. Travel restrictions and containment measures will lead to a scarcity of workers returning from holiday as logistical bottlenecks are to be expected at least through February. This will disrupt regional supply chains.

The impact of the Coronavirus is spreading globally as stock markets have tumbled, travel restrictions are implemented, airlines have cancelled flights and some countries have closed their borders or put in place quarantine policies. International companies in China have either halted or shut down operations or restricted employee travel. The likely effect on the Chinese economy and spillover effects globally will be more serious than that from the SARS outbreak. The Chinese economy has grown tremendously since then and has become a vital part of the intricate network of the world economy. Lower spending from Chinese tourists abroad will potentially also increase the global impact.

There are signs that the rate of the spread of infection is slowing down (CNHC, WHO), which indicate that the comprehensive measures taken by the Chinese authorities are generating results. It is therefore expected that the rate of infection will slow during February and March, and that production in the industrial sector will have a careful recovery in March before rebounding in the second quarter of 2020.

Steel prices have yet to tumble but reduced domestic demand for steel in China will lead to a reduction in steel prices during February. Along with reduced steel production in the first quarter, mining of raw materials like coal and iron ore are also expected to decline. Transportation bottlenecks caused by restricting truck movements across province lines will limit raw materials from reaching their destinations. A potential 9% decline q-o-q (-2% y-o-y) in Chinese steel production in the first quarter would lead to a reduction of 200Mt annual rate of iron ore imports. The rebound in steel production during the second quarter could be in the magnitude of +15% q-o-q. But it would represent a 0.5% reduction y-o-y, or a further shortfall of 55Mt of imported iron ore. The anticipated significant recovery in the third and fourth quarter would regain about 120Mt of the lost volumes.  Based on previous historical events ViaMar expects the Chinese government to respond to this setback by introducing supporting economic policies, leading to an expected 3.3% increase in steel production in 2020. This would be about 1.5%-point lower than in our previous forecast for 2020, produced before the Coronavirus outbreak.

In addition to the decline in iron ore demand in China, the severe weather conditions in southern Brazil have disrupted iron ore production and shut down two rail transportation systems in the region, leading to a significant decline in exported volumes. Vale production guidance for the quarter was already adjusted down to 68-73Mt primarily due to weather related seasonality. Lost volumes from Brazil could be replaced by short haul supplier Australia. Potentially depressing Capesize rates further. However, Cyclone Damien (potentially a category 4 cyclone) is set to hit shores in the iron ore rich Pilbara region this weekend and may reduce both output and exports from the largest iron ore ports in Australia as well.

On the energy side, reduced industrial production, manufacturing activity and inland travel will lead to lower energy demand. Wenzhou for example, a major commercial hub and manufacturing center, will not allow business to start up until February 18th, representing one of the longest Corona related suspensions in the country. ViaMar expects coal import numbers in January to be close to 30Mt as undeclared volumes from December will move through customs. February and March volumes are also set to drop while a rebound is expected from April, given no further extensions to the holiday. The volumes, however, represent short haul distances from Indonesia and Australia limiting the dry bulk market impact. Chinese authorities have previously signaled a continuation of coal import quotas for 2020. ViaMar expected this policy to dampen the growth potential of imported coal to around 300-330Mt. The Coronavirus outbreak could reduce this potential by another 20Mt during the first half 2020.

These negative trade disruptions come at a time when deliveries of new vessels make a seasonal peak. The Orderbook from October 1st 2019 schedules 14.2Mdwt for delivery in q1 2020, while the snow balled orderbook from January 1st 2020 schedules 18.4Mdwt for delivery in q1 2020. In January 7.2Mdwt of new vessels hit the waters, leaving 7-11Mdwt yet to be delivered in q1 depending on which orderbook you compare to. For delivery between February and June about 50 vessels resides at Chinese yards expected to be delayed by potentially 3-6 months. In addition to declaring force majeure on newbuilding contracts, repairs and retrofits at Chinese yards are also set to be delayed. Class societies and equipment manufacturers are also affected by the Coronavirus complications. For example, most vessels at COSCO yards were performing scrubber retrofits and ballast water treatment as well as regular dry-docking. Newswires report that a COSCO official stated: “we believe that if its spread is under control within the next two or three weeks, production could be back to normal two or three weeks after that”.

To conclude, If the Coronavirus measures lead to a 9% q-o-q decline in steel production in the first quarter it will lead to a potential 200Mt drop in imported iron ore in the same quarter. It is also natural to expect an inventory draw of iron ore stock in China as supply disruptions hamper output from Brazil. However, the distance effects for shifting iron ore supplier from Brazil to Australia are marginal compared to the direct effects of lower iron ore trade. Not taken into consideration supply side adjustments, such as increased scrapping or delayed deliveries, the effect on the market is a significant rebound in the second half of 2020. We assess the impact of the Coronavirus to be a 1.3% point drag on the dry bulk utilization for 2020. In a recovery mode in the second half, freight rates for a Capesize may potentially close in on 30-35 000$/day. A Panamax and Supramax may reach more than 15 000$/day in the same time span, in our view. I.e. above last year’s levels.

If the Coronavirus measures prove to be less effective than currently assumed, the recovery will be postponed accordingly.

 

 

Ingrid N. Aas

Senior Shipping Economist

 

Disclaimer: All information provided by ViaMar AS, whether oral or written, is ViaMar AS’ present opinion, and is subject to change without notice. Clients cannot rely solely on the information provided by ViaMar AS. ViaMar AS shall not be liable for any damages or for the breach of any warranty, expressed or implied, or for any other obligation or liability on account of the services rendered, whether due to negligence or otherwise.