As China goes, so goes ocean shipping. China is pivotal to dry bulk and tanker shipping markets on the demand side and to container shipping on the supply side. Any risk to China’s economy and its consumption of raw materials puts shipping in the crosshairs — and that risk is rising.
Concerns had been building for weeks over Chinese state intervention in bulk commodity trades. Then, on Monday, fears of financial contagion spiked due to the expected default of Chinese property developer Evergrande. Shipping shares plunged along with the rest of the stock market.
Dry bulk shipping
Dry bulk shipping is most directly exposed to recent events in China: both to a possible decline in construction due to fallout in the property development sector, and to government intervention in commodity trades.
Many dry bulk stocks have hit 52-week highs in recent weeks. On Monday, they reversed course.
Shares of Golden Ocean (NYSE: GOGL) plunged 17% in five times average volume. Shares of Eagle Bulk (NYSE: EGLE), Genco (NYSE: GNK) and EuroDry (NASDAQ: EDRY) declined 14%, Safe Bulkers (NYSE: SB) 13%, and Star Bulk (NYSE: SBLK), Pangaea Logistics (NASDAQ: PANL) and Grindrod Shipping (NASDAQ: GRIN) 12%.
Even before the sell-off, Nick Ristic, lead dry cargo analyst at ACM Braemar ACM Shipbroking, had warned: “We are …. receiving alarming signals from China. The apparent slowdown in China’s economy, along with instability in the property market, present a significant risk [to dry bulk] for the longer term.”
Maritime Strategies International (MSI) cautioned, “Signs are mounting that suggest underlying consumption of raw materials in China is under threat.”
China’s steel production fell 12% year on year in August, “the greatest year-on-year slump in percentage terms since the global financial crisis,” said Ristic. According to S&P Global Platts, Chinese steel cuts have accelerated this month.
The benchmark price of iron ore (used to produce steel) declined to $94 per ton on Monday, less than half its price in May and the lowest price since July 2020.
Breakwave Advisors said Monday: “The cost of transporting iron ore from Brazil to China as a percentage of the delivered price reached a new high today, as freight prices remain strong while iron ore prices have collapsed. The ratio is now approaching 40%.”
Spot rates for Capesizes (bulkers with capacity of around 180,000 deadweight tons that carry iron ore) averaged $53,795 per day on Monday — another decade-high. But futures sank. According to Clarksons, one broker described Monday’s trading of Capesize forward freight agreements (FFAs) as “mayhem.” Q4 FFAs pulled back to $36,750 per day and Q1 FFAs to $20,250 per day.
The tanker sector is in the midst of its worst depression in 30 years. Any slowdown in China’s economy is bad for crude and products tanker demand and would delay a recovery.
As with dry bulk, the central government is intervening in liquid bulk markets. China announced this month that it would auction crude from its strategic petroleum reserve (SPR) to stabilize pricing. The first auction, for 7.4 million barrels, will be held Friday.
According to Argus Media, “The amount to be auctioned is relatively small, far less than the expected 20 million barrels, and represents only a fraction of China’s monthly imports, which [totaled] 325 million barrels in August. But it appears likely that there will be further auctions … in October-December.”
MSI called China’s new SPR policy “historic,” adding that it “further reinforces the view that crude cargo volumes are under substantial pressure.”
Poten & Partners warned Friday that “tanker owners can no longer take Chinese growth for granted” and that “it appears the days of rapid, unbridled growth are behind us.”
It highlighted the growing Chinese regulation of independent refiners known as “teapots,” which have been the largest contributors to Chinese import growth since 2015.
“Recently, the government has limited quota allocations and increased taxation, which squeezed the margins of the teapots, forcing rationalization and consolidation. For tanker owners, this means less import volumes,” said Poten.
Tanker shares took less of a hit than dry bulk shares on Monday. Pyxis Tankers (NASDAQ: PXS) fell 10%, Top Ships (NASDAQ: TOPS) 9%, Scorpio Tankers (NYSE: STNG) 8%, Nordic American Tankers (NYSE: NAT) and Frontline (NYSE: FRO) 7%, Teekay Tankers (NYSE: TNK) 5%, and International Seaways (NYSE: INSW) and DHT (NYSE: DHT) 4%.
Container shipping is considerably less directly exposed to recent events in China than tanker and dry bulk shipping.
Containerized exports continue to be a success story for the Chinese economy. China’s export numbers for August surprised to the upside, rising 26% year on year despite escalating port congestion on the U.S. West Coast. Concerns that large-scale COVID lockdowns could cripple Chinese supply chains have at least temporarily abated. Container freight rates and ship charter rates remain at all-time highs.
Nevertheless, container shipping stocks — which, like dry bulk stocks, hit 52-week highs recently — were dragged down in Monday’s selloff.
Among the liner operators, shares of Zim (NYSE: ZIM) fell 9% and Matson (NYSE: MATX) 4%. Among the container-ship lessors, shares of Euroseas (NASDAQ: ESEA) — which recently leased out one of its ships for a record $200,000 per day — declined 8%, Global Ship Lease (NYSE: GSL) dropped 7%, and shares of Danaos (NYSE: DAC), Costamare (NYSE: CMRE) and Capital Product Partners (NYSE: CPLP) declined 6%.
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