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Chinese scrap hurting demand for Capesizes

Chinese imports of iron ore keep falling, while its crude steel production keeps growing, fuelled by the country’s use of scrap metal.

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Chinese scrap hurting demand for Capesizes

China’s increased use of scrap metal for its production of crude steel is fundamentally critical to the dry bulk shipping industry. It is mostly Capesize ships that are impacted by this, way beyond the temporary iron ore export disruptions in Brazil and Australia, according to shipping association Bimco.


Chinese steel production grew by a massive 12.6 Mt (+9.2%) year-on-year in the first two months on 2019, according to China Iron and Steel Association (CISA) estimates. During the same period, Chinese imports of iron ore, the paramount steel production ingredient, fell by 5.6%, or 10.3 Mt.


“For two decades, the dry bulk shipping industry has relied on growth in Chinese steel production to continuously spur seaborne imports of high-quality iron ore – from Australia and Brazil,” said Peter Sand, Bimco’s chief shipping analyst.


“That trend has now vanished and the Capesize ships operating on the spot market feel the pain. Growth in volumes are gone and iron ore is increasingly being shipped on long term contracts.


“The 10.3 Mt fall in Chinese iron ore imports is equal to 57 Capesize loads (180,000t) fewer for the first two months of 2019 only. If that’s the pace we will see for the full year, we are in for a tough time.”


According to Bimco, it is no longer only a matter of squeezing out low-quality domestically mined iron ore from the list of ingredients to grow Chinese imports. The focus area of the past five to 10 years is changing. It has become secondary to the rapidly increasing use of scrap steel. This development is a very illustrative example of the potential negative impact the circular economy will have on shipping.


Changes to the Chinese steelmaking industry have pushed a move towards increased use of scrap metal, away from using imported and domestically mined iron ore blend into a solid amount of coking coal.


China’s seaborne imports of coking coal fell by 11.2% (4.9 Mt) in 2018, with the slide continuing into 2019. Chinese coking coal imports are down by 16% in January-February 2019 from the same period in 2018.


“This year, Bimco is putting special focus on this decoupling between steel production and iron ore imports, as the mega driver for Capesize transportation demand may not only disappoint, but worsen its fate,” said Sand.


While India has now surpassed Japan as the world’s second largest steel producer – it produced only 12% of what China did in January-February 2019. Indian crude steel production grew by only 22,000t (+0.1%) in January-February 2019, according to the World Steel Association. In 2018, China produced 52% of all crude steel.


Putting the significance of China further into context, global crude steel production excluding China, fell by 1.5% (-2.2 Mt) in the first two months of 2019.


As for crude steel production outside of Asia, only the Middle East (+0.5 Mt), Africa (+0.1 Mt) and North America (+0.5 Mt) staged increased production.


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