The effects of Chinese sovereignism on the freight market / ANALYSYS

Genoa - In the first 11 months of 2018, in China total coal and lignite imports increased a strong 8.9 percent to 270.5 mln tonnes. Of this, imports of steam coal and lignite increased by 13.5 percent year-on-year to 209.4 mln tonnes.


Genoa - In the first 11 months of 2018, in China total coal and lignite imports increased a strong 8.9 percent to 270.5 mln tonnes. Of this, imports of steam coal and lignite increased by 13.5 percent year-on-year to 209.4 mln tonnes, while coking coal imports decreased by 4.2 percent to 61.1 mln tonnes. However, it is uncertain if 2018 full year imports will exceed the 2017 volume of 271.1 million tonnes, following the introduction of coal import restrictions in November and signals by the government to keep the year’s imports below 2017 levels. While import restrictions have since started to relax with the start of the new year – with waiting times for customs declarations to be completed at around 15 days now, compared to 30-40 days when restrictions were in force – China’s National Development and Reform Commission (NDRC) is said to be considering monthly coal import controls in 2019. The pursuit of monthly import controls instead of an annual quota is a sign that upside in coal import volumes may be more limited going forward, as the government seeks to increase domestic production while limiting falls in price. In 2019, domestic coal production is expected to increase by around 100 million tonnes. Indonesia and Australia dominate coal exports to China, accounting for 45 percent and 29 percent respectively of China’s import volume in the first 11 months of 2018. Over Jan-Nov 2018, total coal imports from Indonesia surged 11.7 percent year-on-year to 121.8 million tonnes, mostly from an increase in lignite shipments.
While Indonesia supplies mainly lignite which are of a low calorific value, they tend to be low in sulphur and trade at a large discount to higher-quality thermal coal from Australia. They are thus useful for blending with higher-sulphur domestic supplies and imports. On the other hand, Australian shipments fell 2.1 percent to 78.4 million tonnes, largely as coking coal shipments decreased with easing Chinese import volumes. Chinese coking coal imports have been falling this year, even as steel production increased 9.4 percent year-on-year over the same period to 851.4 million tonnes, likely due to Chinese mills requiring less coking coal as they increased scrap usage in steel making, some inventory run down due to high coking coal prices in 1Q 2018, and renewed coal import restrictions in November.


Dry bulk fleet review

In 2018, deliveries of dry bulk carriers over 20,000 dwt fell to its lowest level in a decade, coming in at 266 units equivalent to 27.3 mln dwt. This compares to 427 units totaling 37.1 mln dwt delivered in 2017, and the previous capacity low of 22.7 mln dwt comprising 300 units in 2008. In terms of units, deliveries in the Supramax category (mostly Ultramaxes between 60,000-64,000 dwt) again formed the largest share of 29%, with 76 units equivalent to 4.7 mln dwt delivered. In deadweight terms, Capesizes formed the majority of 35%, counting 26 units totaling 9.5 mln dwt. Dry bulk demolitions in 2018 also fell to a record low of 41 units totaling 4.0 mln dwt, a sharp drop compared to 192 units equivalent to 13.6 mln dwt scrapped in 2017. Capesize demolitions formed a majority of 37% and 61% in unit and deadweight terms respectively, with 15 units equivalent to 2.5 mln dwt reported scrapped. The average scrapping age in 2018 for dry bulk carriers was 27.7 years, with Panamaxes having the lowest average scrapping age of 22.5 years, while Capesizes came at a close 23.3 years. The dry bulk net fleet growth was 225 units totaling 23.3 mln dwt, representing a 3.0% fleet growth. Fleet growth remained relatively on par with the 3.2% growth seen in 2017, as both delivery and demolition activity slowed down immensely in 2018. In unit terms, Supramaxes, Handysizes, and Panamaxes saw the greatest net increase of 64 units, 59 units, and 57 units respectively. In deadweight terms, Capesizes saw the greatest net increase of 9.0 mln dwt comprising of 24 units. In 2019, after assuming a lower slippage rate of 25 percent based on improved freight rates and market sentiment, dry bulk deliveries are expected to increase to 37-38 mln dwt. Demolitions could see an increase this year after hitting a bottom in 2018, especially if complying with the Ballast Water Management Convention and upcoming IMO 2020 sulphur cap prove too costly.
However, actual demolition activity would depend greatly on actual market performance, which could see an improvement this year as vessels are taken off the market for scrubber installation, but also faces the risk of dampened demand due to the U.S.-China trade war and slowing Chinese economy. Based on our current assumptions, the dry bulk fleet could grow around 3-4% this year.


EU steel safeguard measures
Recently the European Commission revealed that EU member countries had approved final safeguard measures on steel, which would be implemented by 4 February and extend to July 2021. The measures are expected to come in the form of tariff-rate quotas, based on the average volume of imports over 2015-17 with an additional 5% added. Further steel imports above the quota would be subject to a 25% tariff, and major steel exporting countries would also face country-specific limits. The measures had been proposed in response to a surge in steel imports, with Eurofer estimating EU steel imports increased an unprecedented 12% in 2018. Over January-November 2018, Eurofer recorded EU steel imports had grown 12.2% year-on-year to 27.4 million tonnes, while steel exports fell 9.2% to 19.0 million tonnes. The rise in European steel imports have been attributed to U.S. tariffs of 25%, which were initially imposed in March on most countries, and then expanded to include the EU in June. With U.S. tariffs on Turkey then doubled to 50% in August, the measures have given rise to concern that steel volumes originally destined for the U.S. were being redirected to Europe, threatening European steelmakers as demand growth in the region slows.
In their previous quarterly review in October 2018, Eurofer forecasted the EU’s apparent steel consumption to rise by 2.2% to around 163 million tonnes in 2018, with growth expected to slow to 1.1% in 2019. With imports increasing by 12% in 2018, and exports also seeing a substantial fall, steel mills in the EU have at best only been able to deliver around the same amount of steel as in 2017. Austria and Germany were most affected in terms of steel production volume, falling 16.2% and 2.6% year-on-year respectively over this period to 6.3 million tonnes and 39.0 million tonnes. The EU’s latest safeguard measure appears set to target imports from Turkey and Russia, which will face country-specific quotas compared to previous provisional global quotas (which had meant that these countries could still ship more steel to the EU if their material arrived first).
Turkey steel shipments to the EU increased 66.6% year-on-year to 5.7 million tonnes over January-November 2018, while Russian shipments increased 58.5% to 3.4 million tonnes.