The dry bulk sector is closely monitoring the liquidation of Chinese property developer, Evergrande, a main driver of the industry in China.
On January 29, a Hong Kong court mandated the liquidation of China Evergrande Group, a major property developer burdened with debt of more than US$300 billion.
"China's property market is estimated to account for approximately 35% of the country's steel demand. It is an important driver for economic growth and raw materials like iron ore, coking coal, wood, and cement," said Filipe Gouveia, shipping analyst at BIMCO.
"Overall, the Chinese economy is a significant driver of dry bulk, and more than 35% of dry bulk volumes are destined for China," he added.
BIMCO — one of the largest of the international shipping associations representing shipowners — noted that this development could further erode investor confidence and worsen the outlook for China's real estate sector.
It added that, for example, in 2023, investment in real estate declined by 16.5%, even as the economy grew.
"The court's mandate was issued in response to Evergrande's failure to present a viable restructuring plan. Yet, Evergrande may still appeal, and it is still uncertain whether the ruling will be accepted by the Chinese courts," the BIMCO report said.
The Chinese real estate crisis began in 2020.
"The government stepped in to curb soaring debt levels and since then, Evergrande has been at the forefront of the crisis. It has significantly impacted construction activity, with the floor area of new real estate dropping to less than half of what they were before the crisis," it added.
Over 85% of China's steel is manufactured in blast furnaces, which use iron ore and coking coal as raw materials.
BIMCO said given China's depleted iron ore resources, the country relies heavily on imports, importing 73% of global seaborne iron ore volumes.
"Despite the property crisis, Chinese steel production increased in 2023 due to higher steel exports and strong demand from car manufacturing. Consequently, both iron ore and coking coal shipments strengthened, leading to stronger freight rates for capesize ships," Gouveia said.
In the short term, the outlook for Chinese dry bulk imports seems stable.
BIMCO said both exports and car manufacturing could continue to support steel production in China, while iron ore inventories are down 7% y/y.
Furthermore, Evergrande's chief executive has asserted that current housing projects will be delivered.
Impact on dry bulk market
"In the medium term, the outlook for the dry bulk market, especially for the Capesize segment, will depend on how China manages the liquidation of Evergrande," Gouveia said.
"Some believe that Evergrande will be allowed to fall with a negative impact on home buyers, financial institutions, economic growth, and iron ore demand. We believe that at least some of the negative effects will be mitigated by the government," he added.