The Baltic Dry Index is sharply down. This has little to do with overall shipping trends, but is due to a sharp slump in Chinese imports on which global shipping depends.
The Baltic Dry Index (BDI) has fallen from 4,074 points in the beginning of June 2010 to 2,482 points on Monday, 28 June 2010. The shipping index has dropped significantly due to the slowdown in iron ore imports.
There is excess steel capacity, therefore, China will now need to stabilize and not continue steel production like it has been producing in the past two months. It will either look at lowering its utilization or shut-downs. This has caused a fall in iron ore demand, affecting the Capesize Index and the BDI in turn.
China had been producing steel at a significantly high rate, until last month. It recorded its highest-ever steel production in the past two months. However, this growth momentum in Chinese steel production has come to a halt due to weak steel prices and China’s internal economic issues, leading to lower demand for iron ore.
In addition to the current global steel production scenario, China has also scrapped its rebate policy on imports. This in turn has made Chinese steel lose its low-cost advantage. There is no significant cost-competitiveness left. China’s cap on real-estate prices has also depressed the country’s steel demand from the real-estate segment. The Chinese government, in one of its measures to curb inflation, is trying to curb real-estate prices.
The Government has already banned Chinese traders importing low-grade coal, in order to arrest the rise in steel prices. Baosteel Group Corp, the nation’s second-biggest mill, was quoted in an international daily, saying that steelmakers in China may cut output next quarter, because of weak demand from auto and appliance makers.
Both iron-ore and grain shipments from South America have been difficult to come by and the excess tonnage is beginning to build rapidly. Until more iron ore stems appear, it is likely that freight will continue to drift.
All in all, going forward, Chinese iron ore demand is expected to be weak. Not much movement is expected on China’s iron ore demand. There is also not much clarity on how long will the ban on Chinese traders continue.
~~ Excerpt from MoneyLife.in
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