China's Demand Slows, BDI Index Unlikely to Jump

Wednesday, August 19, 2009

According to a London report issued Aug. 14, dry bulk freight rate index climbed by 2.5% on Friday at Baltic Mercantile and Shipping Exchange, a moderate rise for two consecutive days.

Royal Bank of Scotland (RBS) indicated in its report that China's bulk commodity import will slow down, and that China's bulk material import is predicted to drop from record high and slacken afterwards, according to Financial Times, Aug. 17. believes that, due to many factors, the second-half BDI index is unlikely to continue its Q2 high, and will stay at a relatively low level as China's demand for bulk commodity slows and freight capacity increases.

China imported a vast amount of iron ores in the second quarter, driving up BDI index to as much as 4,291 points, a record high in 8 months. However, latest observations on China's port transactions suggested stockpiles in iron ores in most ports. The gobbling-up in the second quarter has led to a high inventory level in iron ores that far exceeds demand.

In addition, China is expected to transfer a large portion of iron ore freight business to India and Brazil as a ramification of the Rio Tinto incident, while reducing shipping volume with India on iron ore.

Ignited by the relationship between China's coal companies and electricity-generating companies and complicated by the low freight rate of dry bulk shipping amidst the global economic slowdown, China's electricity- generating enterprises had suspended domestic coal sourcing for a prolonged time. Now with a rebound of freight rate and as coal price hikes, the situation is reversed, damping the pricing power of imported coals.

Although some developed countries like Japan have showed signs of rebound, the momentum remains weak. Demand for iron ore will stay moderate for quite a long time. Furthermore, since developed countries' infrastructure constructions are not as vibrant as China's, their demand for iron ore will not offset the fall-back of China's domestic demand.

In the boom era of the shipping industry prior to the crisis, a lot of new vessels were being built. Many of the completed vessels have to postpone their delivery during the financial crisis, and these freight capacities will be unleashed in the near future, threatening to drive down the freight rate in the entire dry bulk shipping market.


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