Demand is falling across several freight markets

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In the mid-2000s, when shipping stocks first became popular on Wall Street, the stocks were commonly bought as a play on China’s economy. China is essential to shipping, whether it is container ships, oil tankers, bulkers or gas carriers.

“There’s a saying that anything that moves out of China in containers has to come into China as commodities,” Oeyvind Lindeman, chief commercial officer of Navigator Gas (NYSE: NVGS ), noted on his company’s recent conference call.

Ominous signs of China’s weakening economy are showing in all shipping sectors at once.

The glass half-empty is that declines in shipping demand are harbingers of more serious economic problems to come. The glass-half-full view is that declines are temporary. A recovery in Chinese demand for iron ore, oil and gas will ultimately increase commodity shipments.

Container freight

Sales of containerized goods to the US and Europe supported the Chinese economy throughout the pandemic. Markets were rattled on Wednesday as China’s official monthly export statistics came in much lighter than expected.

China’s exports rose 7.1% year-on-year (y/y) in August, well below the consensus forecast for 12.8% growth. Exports had grown 18% y/y in July. China’s exports to the US fell 3.8% y/y in August, compared with an 11% increase in July.

Output volumes are pushed from both sides. Demand for Chinese goods is falling as COVID-19 lockdowns and weather issues limit Chinese production and logistics.

A chart showing US reservations for goods in China by date of departure
Index: January 2019 = 100 (Chart: FreightWaves SONAR)

The government has extended lockdowns in Chengdu and announced new nationwide measures until the end of October. Analysts do not foresee any easing of China’s zero-COVID policy this year.

Meanwhile, China recorded its highest temperatures and lowest rainfall in over six decades last month. The resulting blackouts forced factory shutdowns in Sichuan.

Dry bulk import

China is the world’s largest producer of steel. Its steel production in January-July fell by 6.1% y/y. Production in July fell 10% compared to June.

“The decline in Chinese steel production has largely come from the ailing property sector and stop-start industrial activity due to the COVID-19 lockdowns,” Mark Nugent, dry cargo analyst at shipbroker Braemar, wrote in a research note on Thursday.

Brokerage EastGate Shipping said the heat wave and power shortages forced 20 steel mills to go offline for about a week in mid-August.

Steel production drives Chinese demand for iron ore imports, mainly from Australia and Brazil. These are the main cargoes for Capesizes, larger bulkers with a capacity of around 180,000 deadweight tons. Average Capesize spot rates collapsed from $38,200 at the end of May to just $5,600 per day on Friday, according to data from Clarksons Securities.

Brokerage firm BRS blamed the drop on the diversion of Australian iron ore from China to Southeast Asia, and more damaging to rates, a sharp drop in Chinese imports of long-haul Brazilian iron ore in August.

“Scorching temperatures and a relentless zero-COVID policy severely crippled steel demand in China,” BRS said. It does not expect a full recovery of Chinese steel production until next spring, “casting doubt on a radical recovery in seaborne demand for iron ore.”

Oil imports

China is by far the world’s largest importer of oil. Chinese imports are the main driver of spot rates for larger tankers with a capacity of 2 million barrels, known as very large crude carriers.

According to Poten & Partners, Chinese crude oil imports grew rapidly from 4.1 million barrels per day (b/d) in 2009 to 10.1 million b/d in 2019. Growth slowed in 2020 when the pandemic hit, falling by 550,000 b/d in 2021.

Chinese imports fell to 8.7 million b/d in June, the lowest monthly average since July 2018. Imports were 8.8 million b/d in July and 9.5 million b/d in August.

The International Energy Agency said in its latest outlook that China’s shutdowns “set back our expected demand recovery by two months.”

BRS noted that China has 920,000 b/d of new refinery capacity scheduled to come online by the end of the year. Normally, this would increase the demand for crude imports. However, China’s refining capacity is already higher than domestic consumption, and the government has not pushed exports.

“Given our relatively pessimistic near-term outlook for China, [with] COVID and lockdowns remain a going concern until at least early next year, we expect some upside in Chinese runs as Beijing appears unwilling to allow its refiners to focus on export markets,” BRS said.

LPG shipment

China is also one of the world’s largest importers of liquefied petroleum gas (LNG): propane and butane.

In addition to its energy use, China imports propane as a feedstock for propane dehydrogenation (PDH) plants to produce propylene. The propylene is used to make polypropylene, which in turn is used to make plastic.

Tim Hansen, chief commercial officer for Dorian LPG (NYSE: LPG ), referred to Chinese demand headwinds during his company’s latest call. Hansen cited “renewed impact of COVID-19 lockdowns” and concerns about Chinese demand that “were a factor for market players, resulting in more risk-averse [behavior] and reduced opportunistic trades.”

According to Lindeman of Navigator Gas, “All eyes are on China and when they are coming out of their malaise.”

LNG shipment

In the liquefied natural gas (LNG) sector, Europe is now buying a much larger share of US exports than usual due to the fallout from the war between Ukraine and Russia.

Oystein Kalleklev, CEO of Flex LNG (NYSE: FLNG ), said on his company’s latest call: “In a way, you can say that Europe has been very lucky because the cooling in the Chinese economy driven by the COVID lockdowns has resulted in lower demand from China.

“Chinese imports this year have fallen by more than 20% [or] 9 million tons. And European buyers have been able to access these cargoes, which would have been much more difficult if the Chinese economy was running at normal capacity.”

Kalleklev believes China will return to the LNG import market in a big way, pointing to commitments for new volumes that have yet to come into operation.

“Although China has a reduction in LNG imports this year, they are signing almost half of these new volumes because the LNG story in China is in its early phase,” Kalleklev said. “This year, Japan will probably import more LNG than China. And there are more than 10 times as many people in China. So China will continue to grow as they get COVID under control and recover their economy.”

Click for more articles by Greg Miller



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