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China June Iron Ore Trade May Slow But Won't Mirror BDI Rout
Jul 8,2010 14:40CST
data analysis

BEIJING, July 8 -- China's iron ore imports in June are expected to fall compared to May and a year earlier, but the size of the decline isn't expected to reflect the far more drastic plunge in the Baltic Dry Index since May.

China's iron ore imports is a barometer of the country's economic expansion, and the sea-borne intake of the steelmaking material will be closely watched when customs officials release June's trade data on Saturday.

While the market widely expects June ore imports to track downward, in line with on-year and on-month declines in both April and May, a critical question is whether Chinese demand has slackened in direct proportion to the sharp 50% decline in freight rates over the last month.

The falling Baltic Dry Index has primarily been an issue of deadweight oversupply, complicated by early signs of slower Chinese economic growth, for which the pace and depth of the slowdown aren't clear yet, shipbrokers say.

"The number one (cause of falling freight rates) is the oversupply of (deadweight) tonnage," said Jay Hsiao, a Beijing-based shipping broker with Braemar Seascope Ltd. "But the question also is: How much is China going to slow down?"

The Baltic Dry Index is one way to gauge demand for dry bulk commodities, including iron ore and coal, for which China is the world's top consumer.

But the other factor is the supply of ships, and ship brokers say a long foreseen glut has just begun to enter the market and could reach 15% above demand levels next year.

Capesize vessels are expected to nearly double by next year, with 812 vessels on order in addition to 968 currently in service globally. Their smaller cousins, the Panamax, number 1,509 with 585 on order, according to Braemar data. Most of the new deliveries are expected in 2010 and 2011.

China's Demand Plays Critical Supporting Role

Since April, Chinese steelmakers have faced tighter credit conditions, government measures to cool the steel-dependent construction sector, yuan appreciation concerns, and the end of export tax rebates that favored lower value-added steel products.

Spot Chinese iron ore prices are down this week to $135 a metric ton, shedding 12% since mid-June.

But this doesn't suggest an outright collapse in Chinese demand.

"The magnitude of the decline in June iron ore imports isn't going to be that large," said Ma Haitian, a senior steel analyst with Beijing's state-backed Antaike metals consultancy.

"A lot of June imports is going to be from orders contracted in April, when economic conditions weren't that bad for the steel industry," he said.

Even as the Baltic Dry Index collapsed, spot-chartering shipping fixtures to China stayed fairly even.

Ore fixtures made a net gain of five fixtures in the first four weeks of June, and then rose by around 20 fixtures in the last three days of the month, data from Commodore Research showed.

It's possible for spot chartering activity to rise even as freight rates fall, Hsiao said, because of deadweight oversupply.

During June, iron ore stockpile monitored at Chinese ports stayed largely flat at 69.85-70.93 million tons.

China can't reverse its reliance on sea-borne ore imports overnight, Standard Chartered said in a research note this week.

The country's demand for the material is likely to rise 7% on year in 2010, while steel consumption would also likely rise by 9% in 2010 and another 5% in 2011, the bank said.


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