Easing Covid Restrictions - A Dry Bulk Recovery?
In many quarters, an easing of China’s strict Covid policies has been seen as the panacea for most of the ills that the freight and commodities markets have been facing. The assumption is that the removal of many of the restrictions put in place to limit the spread of the coronavirus and a reopening of the Chinese economy will drive a rebound in Chinese demand for commodities and, by extension, seaborne transportation. However, the mounting challenges facing the global economy could negate such a development if the domestic Chinese economy remains sluggish.
Last week’s release of Chinese trade data confirmed what many had feared. The country’s economy is facing increasingly strong headwinds both domestically and in its export markets. Most economists had been expecting a substantial drop in both imports and exports during November compared to the same month last year. However, the numbers failed to match even the low expectations. Chinese exports dropped by 8.7 per cent year-on-year last month, while analysts had been expecting them to decline by 3.5 per cent, as global economic headwinds and Covid-related disruptions weighed on trade volumes. The country’s imports fared even worse and declined by nearly eleven per cent, against a projected drop of six per cent. The domestic economy has remained sluggish amid persistent problems in the property sector and weak consumer sentiments.
The release of the weaker-than-expected trade data coincided with a widely anticipated relaxation of the Chinese Covid regulations. Over the past few weeks, the stage had been set for the announcement, with one of the country’s top health officials stating that the fight against the coronavirus was entering a new phase. Around the same time, the head of the Chinese central bank announced that the institution’s main mission was to stimulate the country’s economy and that the country’s Covid restrictions had contributed to the flagging growth rate. Hence, the initiative to relax quarantines and lockdown-like conditions and reduce testing hardly came as a surprise. An ambition to increase vaccination rates among the country’s elderly is likely a signal that the Chinese leadership is willing to accept higher infection rates without overburdening the country’s intensive care units.
There are also unconfirmed reports that the Chinese leadership is considering a five per cent growth target for next year. The goal may appear to be a bit ambitious compared to the current year’s growth, which will likely land in the lower end of the three to four per cent interval. However, should it be confirmed, it will signal a decisive shift from Covid control to a greater focus on the well-being of the economy. A high growth target is also likely to put more pressure on local authorities around the country to avoid imposing disruptive restrictions should infection rates rise.
The fortunes of the shipping and commodities markets have become increasingly aligned with those of the Chinese economy since the country joined the World Trade Organization two decades ago. The country’s demand for seaborne imports of raw materials, as well as exports of manufactured products, have skyrocketed. In many cases, such as oil, coal and iron ore, it has become the world’s preeminent importer of some commodities. Hence, a rebound for the Chinese economy could provide renewed support for commodity prices and freight rates following recent strong headwinds.
The Capesizes have been especially affected by the headwinds and restrictions that have descended on the Chinese economy. The combination of weak economic growth and production restrictions on polluting industries have, over the past year, weighed on Chinese demand for imported commodities, such as iron ore and coal, that are often shipped in larger vessels. Freight rates for the Capesizes have suffered as a result, with the Baltic Exchange’s index for the segment languishing around 65 per cent below the levels seen a year ago. However, the Chinese authorities’ move towards a reopening of the country’s economy and an apparent priority for growth over Covid control have improved sentients and contributed to cargo order volumes for the tonnage segment recovering last week.
It is not only the cargoes associated with the Capesizes that are seeing a rebound in Chinese ordering activities. Order volumes for soybeans discharging in China remain unseasonally strong, with the aggregate for November surpassing the total for the same month in recent years. December has also begun on a solid note, with volumes already looking to be on track to top the previous month. Exports from the US are looking particularly robust as China’s crushers are increasing their purchases amid low inventories. An improving outlook for the Chinese economy could further boost Chinese demand for the oilseed on increasing demand from the country’s hog farmers on improving profitability.
Among the agricultural commodities, it is not only soybeans that have seen their cargo order volumes increase in the recent months. A decision in early November by the Chinese customs authority to allow more Brazilian corn to be imported has seen cargo order volumes for Brazilian exports to the Far East of the grain soaring. The robust increase led to unseasonally strong total volumes in November for Chinese and Far Eastern corn imports. The reading was the highest since April 2021, with Brazilian-sourced corn dominating. A solid start to the current month also suggests that the previous month’s substantial volumes could be matched in December.
For coal, China holds the triple crown as the world’s largest producer, consumer and importer of the dirtiest of the fossil fuels. While the country only imports a relatively small part of its needs, the quantities shipped to Chinese ports still remain a substantial part of the global seaborne trade in coal. However, in line with China’s dual circulation policy, rising domestic production this year has made the country less dependent on supplies from foreign shores. As a result, cargo order volumes for coal discharging in China have remained subdued throughout most of the year compared to 2021. Still, as winter approached, volumes staged a recovery and reached a high in October, according to Shipfix’s data. While the reading for November failed to match the preceding month’s, it was still high in a historical context. Given the time lags involved in the seaborne coal trade, Chinese official import data are likely to see a spike in the coming months.
As cargo order data for Chinese coal imports have rebounded, there has also been an increase in the amount due to leave Russian ports for China. Publicly available cargo orders rose to their highest level since April 2021 in November. Lending support to the assumption that at least some of the coal that would normally have been destined for Europe is now ending up in China.
Speculation that Chinese authorities would ease the country’s strict Covid policies contributed to a somewhat improving sentiment, even before weak economic data and public protests delivered a strong enough incentive for an actual change. Since last week’s announcements, many commodities, such as iron ore, soybeans, and Capesize freight rates, have seen some gains reflecting an improving Chinese demand outlook. Beyond sentiments, rising cargo order volumes for cargoes and vessels destined for China are proof that Chinses imports will rise in the coming months.
Still, anyone expecting a rebound akin to what was seen in 2020 after the initial lockdowns will have to face some major disappointments in the coming months. While a reopening of the Chinese economy and stimulus initiatives aiming at higher growth rates will provide some support for commodity prices and dry bulk freight rates, the benefits are likely to take some time to materialise. In addition, the state of the global economy is very different from 2020, with high inflation effectively precluding any additional economic stimulus even if a recession, or at least meagre growth rates, increasingly appears to be a foregone conclusion.
There is also the risk that rising Covid infection rates and increasing mortality could force the country’s leadership to reverse the relaxation of the zero Covid-policy. Such a development would yet again weigh on the country’s economic activities and growth rates and potentially lead to more public protests and civil unrest. Hence, such a U-turn is likely to be a policy of last resort, as it could prove economically and politically costly.