Demand outlook for major dry bulk commodities, the rise and fall of the Euro: consequences for the dry bulk trade

Olle Östensson, Caromb Consulting

Bulk Ports, Terminals & Logistics 2013, 12-14 May 2013, Antwerp, Belgium

Outline of presentation

• A slow global recovery• The Euro crisis is having long term effects on

growth • Slow growth in emerging countries• Iron ore• Coal• Grains

World economic growth is recovering, but is still slow

(annual rate of growth in GDP)

Source: IMF, World Economic Outlook, April 2013

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-6

-4

-2

0

2

4

6

8

10

World

Advanced economies

Emerging market and de-veloping economies

The outlook for the Euro area weakens: Europe focuses on reducing deficits (and is

doing so faster than the US)Government deficit, per cent of GDP

Source: IMF, World Economic Outlook, April 2013

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-16

-14

-12

-10

-8

-6

-4

-2

0

United StatesEuro area

And debt will slowly come downGovernment gross debt, per cent of GDP

Source: IMF, World Economic Outlook, April 2013

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

20

40

60

80

100

120

United StatesEuro area

But the cost is high in lost growth and few new jobs

GDP growth, per cent per year Employment (2007=100)

Source: IMF, World Economic Outlook, April 2013

20072008

20092010

20112012

20132014

92

93

94

95

96

97

98

99

100

101

102

Euro areaUnited States2007

20092011

20132015

2017

-5

-4

-3

-2

-1

0

1

2

3

4

Euro areaUnited States

Unemployment is coming down only slowly and unevenly

Unemployment will fall faster in the US, % And is more evenly distributed• United States

– Highest unemployment: 9.6 % (California, Mississippi, and Nevada)

– Lowest unemployment: 3.3 % (North Dakota)

• Euro area– Highest unemployment: 26.3 %

(Greece)– Lowest unemployment: 5.4 %

(Germany)

Sources: IMF, World Economic Outlook, April 2013, U.S. Bureau of Labor Statistics, Eurostat

20072009

20112013

20152017

0

2

4

6

8

10

12

14

Euro areaUnited States

Conclusion: We saved the Euro, but we killed growth

• Austerity policies in Europe will be a drag on growth for a long time

• Deleveraging in the banking sector will constrain credit, particularly for new enterprises

• Slow growth will impede rather than facilitate structural and institutional change

• Lack of investment in infrastructure will lead to loss of competitiveness

• Trade will be diverted from Europe • Slow growth in Europe will hurt its trading partners – Europe

is still the world’s largest market

Emerging economies are losing steam

The growth engine has run out of fuel• The Euro crisis means that

demand for emerging economies’ exports is growing slower than they should

• Domestic overheating requires cutbacks in government expenditure (or should do so)

• High oil prices squeeze growth

Per cent annual change 2003-2017, emerging and developing countries

Source: IMF, World Economic Outlook, April 2013

20032005

20072009

20112013

20152017

-10

-5

0

5

10

15

GDPExports

Slowdown in China – but little sign of necessary rebalancing

Source: IMF, World Economic Outlook, April 2013

• China is entering a period of economic reorientation with more focus on consumption, less on exports and investment – but the change is happening slowly

• Continued export dependence means that slow growth in developed countries hurts China’s prospects, and at the same time production costs are rising in China

• For demographic reasons, growth will be slower in the future (the labour force stops growing in 2014 or 2015)

20002002

20042006

20082010

20122014

20162018

-15

-10

-5

0

5

10

15

20

25

30

GDP change, %

Exports change, %

Current account surplus, % of GDP

Is slower growth in China a disaster?Addition to Chinese GDP, constant billion yuan renminbi,

historical and calculated at 7 % annual growth

20072008

20092010

20112012

20132014

20152016

20172018

20192020

20212022

20232024

20250

500

1000

1500

2000

2500

3000

Historical7%

Source: IMF, World Economic Outlook, April 2013, and own calculations

Conclusion on the macro-economic outlook

• The recovery is under way, but it is weak and fragile and growth will be below potential for some time

• The global imbalances are growing smaller, reducing the risk of new crises

• The Euro has been saved – we think – but at a very high cost in terms of foregone growth

• Emerging economies see their prospects reduced by slow growth in export markets and their economies are only slowly gaining the capacity to generate endogenous growth

• The United States is our best hope

Short term outlook: Iron ore (1)

• World steel production increased by only 1.2 % in 2012; the rate of growth will be higher this year, at about 3 %

• China will – again – have to account for most of market dynamism.

• Chinese steel demand will grow by about 5 % this year

Crude steel: World monthly production, Mt

Source. World Steel Association

January 2008July

January 2009July

January 2010July

January 2011July

January 2012July

January 20130

20

40

60

80

100

120

140

160

Short term outlook: Iron ore (2)

• Chinese crude steel production was a record 709 Mt in 2012 (increase by 3.6%)

• The rate of increase was slow until last autumn, but is again accelerating, partly because of expansive government policies

• Production will exceed 750 Mt in 2013

Monthly crude steel production in China, change on one year earlier

Source: World Steel Association

January 2012

February

March AprilMay

JuneJuly

August

September

October

November

December

January 2013

February

March

-4

-2

0

2

4

6

8

10

12

14

16

Short term outlook: Iron ore (3) China: imports’ share of iron ore use still growing

• Iron ore imports increased by 8,5 % in 2012, helped by more flexible pricing

• Port inventories have come down dramatically, by 50 Mt, since mid-2012

• Domestic iron ore production (run of mine ore) decreased by 0,5 % in 2012. Ore grades continued declining, however, and if converted to standard grade, production probably fell by 10-20 % - despite reasonably high prices

• The entire additional Chinese need for iron ore in 2013 will be covered by imports, which will probably approach 800 MtJanuary 2008

January 2009

January 2010

January 2011

January 2012

January 201300

10

20

30

40

50

60

70

80

Iron ore imports, Mt/month

Share of im-ported iron ore, % (3 month av-erage)

Sources: China Metallurgical Newsletter, TEX Report

Short term outlook: Iron ore (4)

• Chinese imports up by 55 Mt in 2013• Imports in rest of world up by maybe 20 Mt, with

increases mainly in Asia and North America• Exports increasing from Australia and Brazil,

negligible recovery of Indian exports • Total rise in seaborne trade of 75 Mt in 2013

The longer term

Two tendencies will influence Chinese iron ore imports:• Falling steel intensity as

the economic reorientation gets under way

• Increasing share of imports as domestic mines are forced to close

World supply will be more diversified in the future, but the new producers will take longer than expected to enter the market

Sources: IMF World Economic Outlook Database and World Steel Association (own forecast for steel production 2013)

19941996

19982000

20022004

20062008

20102012

0

5

10

15

20

25

30

increase gdpincrease crude steel production

Short term outlook: Coal (1)• The coal market has become much more dynamic in recent years. Coal is

set to overtake oil the most important energy source and the geography of world coal trade is being reshaped.

• Most important changes:– China’s switch from a large exporter of both thermal and metallurgical coal to

the world’s largest importer– The growth in India’s coal imports– Indonesia’s growing exports (and, to a lesser extent, Australia’s)– Coal being squeezed out of the domestic US market and becoming available

for export, including from the West Coast– The emergence of Mongolia and Mozambique as future major exporters

Short term outlook: Coal (2)Change in imports 2004-2013, Mt

Thermal coal (total change 325 Mt, 65 %) Metallurgical coal (total change 66Mt, 32 %)

0

20

40

60

80

100

120

140

China India South Korea

Japan Europe

-20

-10

0

10

20

30

40

50

Source: Own estimates

Short term outlook: Coal (3)Change in exports 2004-2013, Mt

Thermal coal Metallurgical coal

Indonesia

Australia

Colombia

United States

South Africa

China

Rest of w

orld

-100

-50

0

50

100

150

200

250

300

United States

Mongolia

Australia

Russia

Mozambique

Rest of w

orld

-20

-10

0

10

20

30

40

50

Source: Own estimates

Short term outlook: Coal (4)

• Thermal coal demand in Asia is expected to see a modest increase in 2013 and accelerating growth in 2014, rapidly increasing Indian imports is a new factor

• Elsewhere in the world, slow economic growth and competition from natural gas is limiting demand, but European imports are expected to increase due to replacement of nuclear with coal

• Total growth in thermal coal trade in 2013 is expected at about 30 Mt• Demand for metallurgical coal will follow steel demand, growing by 3-4 %• Seaborne trade will grow by only about 5 Mt• As a result, total seaborne trade of coal is likely to increase by about 35 Mt

in 2013

Short term outlook: Grains (1)World grain production, Mt

• Harvests were disappointing in 2012, but cultivated area is increasing and a rebound in production is expected in 2013/2014 and 2014/2015

• A large portion of the increase will be accounted for by maize, followed by wheat

• Industrial consumption is now a less important driver of growth

Source: Credit Suisse, 3 April 2013

The food crisis over – for now

2006/2007

2008/2009

2010/2011

2012/2013

2014/2015

0

200

400

600

800

1000

1200

MaizeWheatSoybeans

Short term outlook: Grains (2)

• Trade volumes are expected to decline by 10-15 Mt in 2012/2013

• Trade is likely to increase in 2013/2014 and the following year

• Stocks are forecast to fall in 2012/2013, but may recover in 2013/2014

• Shipping volumes in 2013 are expected to increase by 10-15 Mt

Source: Credit Suisse, 3 April 2013 (data for 2006/2007-2012/2013)

Grain exports

2006/...

2007/...

2008/...

2009/...

2010/...

2011/...

2012/...

2013/...

2014/...

0

20

40

60

80

100

120

140

160

180

Maize

Wheat

Overall conclusions

• Assuming that the macro-economic risks are managed...

• 2013 will see only modest growth in dry bulk commodity trade, with total volume increasing by about 100 Mt – but the uncertainty is on the upside

• China accounts for almost all of the increase, most of it in the form of iron ore imports

THANK YOU!

olleostensson@gmail.com