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Capesizes pull back on China’s steel output slump

Capesizes have pulled back on renewed concerns about China’s steel demand following a massive drop last month. Smaller-sized ships however maintain relative strength

Latest data shows a 22% drop in China’s steel production, taking total output in the first 11 months of the year to 946.4m tonnes, a contraction of 2.6%

CAPESIZES pulled back in the last trading week of the year on renewed concerns about China’s appetite for steel.

According to the latest statistics by the World Steel Association, China’s output fell 22% to 69.3m tonnes in November compared with the year-earlier period. In the 11 months of 2021, production contracted by 2.6% to 946.4m tonnes.  

It marks the sixth consecutive month of declines and is below monthly production at the height of the pandemic, according to ship brokerage Braemar ACM, which added that since steel imports have not increased, demand in the country has “dropped significantly below that of 2020”. 

In fact, steel imports declined 42.6% in January to November to 14.1m tonnes versus the same period in the past year.

“The situation has yet to improve,” said dry bulk analyst Nick Ristic, with fixed-asset investment in construction dropping by 0.8% year on year, the first fall in annual growth since October 2020, while growth in infrastructure slowed to 1.1%, the lowest growth rate since July 2020.

Analysts in China are expecting tepid growth going forward due to sluggish property and infrastructure prospects.

The expectations are bearish for the capesize segment which tend to carry iron ore and coal. 

Spot capesize earnings declined to $19,494 per day at the close on the Baltic Exchange on December 23. That is 16% below the start of the week and is the lowest level since June 8. 

However, the rates are still 17% above the same time in the past year.

“The softening in rates was to be expected, given the usual weaker rates in the first quarter,” Genco Shipping & Trading’s chief executive John Wobensmith said, adding that the paper market for the next quarter looked oversold.

He expects a recovery in China’s steel market post-Olympics, and is upbeat that overall dry bulk demand will outstrip new ships hitting the water in 2022. 

US-based consultancy Breakwave Advisors said the backwardation seen in the capesize futures market had now eased, based on expectations for a slightly slower market during the February/March period, followed by a “relatively robust” rest of 2022.

“As a result, the risk/reward appears more balanced, with current demand fundamentals remaining weak, yet a low orderbook combined with a macro picture that favours commodities should keep sentiment upbeat.”

The first quarter was priced at $17,400 per day, as of December 22, while Cal’ 22 was at $23,300 per day, according to broker GFI. 

In addition, decreasing ballasting and lower congestion has added to the weakness in the capesize market.

According to ship brokerage Fearnleys, capesizes and newcastlemaxes waiting to discharge in China have dropped by 50 over the past four weeks, while Brazilian fixing activity has been limited.

Meanwhile, global steel production sank 10% to 143.3m tonnes in November, while in the first 11 months, output gained 4.5%, driven by India, the US, Brazil and Japan.

Panamaxes closed at $21,460 per day, slightly up from the start of the week, but 13% down from a week ago, Baltic Exchange data show. Rates are nevertheless more than double that of this time last year.

Asia saw some improved activity with a supported Indonesian market, which led to “some marginally better bids” but there were “pockets of resistance” on some of the longer round voyages on deferred dates, Fearnleys said in a note. 

Spot supramax rates were at $25,705 per day on the Baltic Exchange, 4.1% lower than at the start of the week, but double year-ago levels, while handysizes closed at $27,057 per day, 2.3% below the level on December 20.

A strong grains season was expected to provide support to the smaller and mid-sized ships into the first quarter.

The Baltic Dry Index was at 2,229 points on December 22, the lowest since mid-April. That is however almost double the level at the start of the year.

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