Lower Iron Ore Prices to Boost Chinese Imports
Dry Bulk Shipping Fundamentals Unchanged
NEW YORK, NY--(Marketwired - Mar 25, 2014) - Please find below
an interview of George Economou, Chairman, President & Chief
Executive Officer of DryShips (NASDAQ: DRYS) by Barry Parker of
BDP1 Consulting.
Barry Parker: Hi George, it's nice to catch up after an
extremely busy week.
Recent news of an expected slowdown in Chinese GDP growth,
coupled with high steel stock piles, decreasing iron ore prices and
lower cape freight rates, have added to the skepticism for a dry
bulk recovery. These topics were debated extensively at recent
conferences. What are your views?
George Economou: The notion of a Chinese slowdown and its
potential implications have been blown out of proportion. Even if
Chinese GDP growth slows to an annual rate of 6.5-7% for the next
2-3 years, as most experts predict, it is still a robust growth
rate, especially when compared to the rest of the world. And, we
believe, that at this level of GDP growth demand for dry bulk
commodities will continue to increase in absolute volume terms.
All indications are that infrastructure developments in China
still have a long way before they reach their peak and even with a
moderate economic slowdown, these projects will still come to
fruition.
Barry Parker: China accounts for about 70% of the world's iron
ore imports, which are the leading item in the drybulk trade. Why
would iron ore imports continue to increase despite a moderate
slowdown in Chinese GDP and steel production growth?
George Economou: Steel production in China continues to
grow but at a more modest pace. This means that demand for iron ore
will also continue to grow. Recent data show that Chinese steel
production increased by approximately 7.5% year-on-year. Overall,
steel production has been above last year's levels, even though
steel prices and steel stockpiles have been at high levels. All
this is encouraging.
Over time, Chinese iron ore demand is expected to grow from 820
million tonnes in 2013 to about 900 million tonnes in 2014 and
closer to one billion tonnes in 2015. And, even if Chinese steel
production growth this year is below the 7.5% rate of 2013, iron
ore imports are expected to increase as they will replace more and
more of the domestic production. Lower iron ore prices can actually
accelerate this trend because the domestic production is very
expensive.
This can be the real game changer. In 2013, domestic iron ore
production accounted for 1,424 tonnes and imports for 820 tonnes.
Chinese iron ore averages only 21.5% in iron content, whereas
imported iron ore often exceeds 50%. Also, imported iron ore
pollutes the environment much less than the Chinese domestic iron
ore.
Environmental pollution has become a much more publicized and
sensitive issue in China and the government has been cracking down
on environmental neglect. Consuming a larger amount of higher
quality, less polluting iron ore can help steel mills to maintain
industrial production and employment levels, issues of critical
importance for the Chinese government and the Chinese economy.
Barry Parker: What will be the impact of lower iron ore prices
on Chinese iron ore demand?
George Economou: With Chinese iron stock piles at a seasonal
high point, the spot price for iron ore with 62% fc content
retreated from nearly $140 per tonne in December 2013 to about
$US105 a couple of weeks ago and recovered back to $110.70 last
Friday.
However, as we have seen in the past, lower iron ore prices can
increase China's reliance on imported iron ore. A recent report by
Fitch showed that when prices were at their lowest in 2013 during
the May-July period, Chinese iron ore production grew only by 2% to
3% while iron ore imports which grew by 13%. This reflects what I
just mentioned, that domestic iron ore production costs are much
higher due to the poorer grade compared to imported iron ore.
Smaller Chinese iron ore producers need prices of about $120 per
tonne to make a profit whereas Australian mines can do so at only
around $60. Lower iron ore prices will drive weaker Chinese mines
out of the market, as they will not be able to sustain
profitability, modernize and expand.
So, over time, Chinese steel mills will replace domestic iron
ore consumption with more and more Australian and to a smaller
extent Brazilian imports. A testament to this is that despite the
recent decrease in iron ore prices, Australian mines have pledged
to maintain current production levels and planned capacity
expansions. More iron ore imports translate to higher demand for
shipping.
Barry Parker: How is the shipping market digesting all this?
Cape rates have retreated recently and the market is rather
nervous. What is the outlook?
George Economou: Let's not let short term volatility, which
will always exist in the commodity and shipping markets, cloud the
longer term fundamentals of the industry, which in our opinion
remain unchanged.
The Cape market has temporarily weakened, but we expect a
stronger freight market as the result of the factors we discussed.
But let's put things in perspective. During the first eight months
of 2013 spot Capesize freight rates averaged $8,000 per day. During
the last four months of 2013, they averaged $28,000 per day.
Year-to-date in 2014 Cape rates averaged $16,000 per day as
compared to $6,000 per day during the first quarter of 2013.
With planned mining capacity expansion, industry experts expect
that an additional 120 to 140 million tonnes of Australian and
Brazilian iron ore cargoes will come to the market this year.
As I mentioned, overall Chinese iron ore demand is expected to
continue to grow and an additional boost to demand will come from
the trend to replace domestic iron ore with imports. And, lower
iron ore prices can actually accelerate this trend.
All this means additional demand for ships, especially Capesize
vessels. But a stronger Cape market ultimately lifts the other
segments as well. Also, newbuilding deliveries are slowing during
this year as well as into 2015 thus tightening the supply demand
balance. Even if Chinese demand slows temporarily, as buyers wait
for prices to fall further, this does not reverse the longer term
trend.
There is more demand for one and two year employment from major
charterers, at levels well above the current spot rates. We have
seen period fixtures at the mid-thirty thousand plus per day, which
indicates the expectation for a stronger market ahead. Also, the
majority of shipping analysts seem to point to the same
conclusion.
And by the way, the dry bulk market is also expected to benefit
from demand for coal, grain and other bulk commodities.
Barry Parker: Given your market outlook, how are you positioning
DryShips in terms of fleet deployment?
George Economou: Given our market outlook, we have
positioned our fleet mainly in the spot market, so that we can take
full advantage of the eventual market recovery. In this context,
64% of our fleet days are open for 2014, 79% for 2015 and 85% for
2016.
No one has a crystal ball, but we have every reason to believe
that the fundamentals for the dry bulk market are quite clear and
point to a stronger market ahead.
Barry Parker: Concluding our interview, can you give us a
summary of your thoughts?
George Economou: Of course. As I mentioned, no one has a
crystal ball. But here are my thoughts on the market.
- I expect global demand for iron ore to increase by about 110
million tonnes in 2014 and similarly in 2015.
- This increase implies the need for 110 additional Capesize
vessels in 2014 and another 110 additional Capesize vessels in
2015. (Every Capesize vessel carries approximately 1 million tonnes
per year.)
- The expected deliveries of Capesize vessels are about 90
vessels in 2014 and a similar number in 2015 and thus there should
be a shortage of Capesize vessels to transport iron ore alone.
These numbers include slippage assumption of 33% which is the
average over the last three years.
- We anticipate the freight market to be hot over the next three
months. It may experience a temporary slowdown in the summer months
and should again be red hot in Q4 2014 following its seasonal
pattern. As for 2015, I expect it to explode.
George Economou: Time to celebrate after a six year downturn in
the shipping markets.
Barry Parker: Thank you; I look forward to celebrating with
you.
About DryShips DryShips Inc. is an owner of drybulk carriers and
tankers that operate worldwide. Through its majority owned
subsidiary, Ocean Rig UDW Inc., DryShips owns and operates 11
offshore ultra deepwater drilling units, comprising of 2 ultra
deepwater semisubmersible drilling rigs and 9 ultra deepwater
drillships, one of which is scheduled to be delivered to the
Company during 2014 and two of which are scheduled to be delivered
during 2015. DryShips owns a fleet of 42 drybulk carriers
(including newbuildings), comprising 12 Capesize, 28 Panamax and 2
Supramax, with a combined deadweight tonnage of about 4.4 million
tons, and 10 tankers, comprising 6 Suezmax and 4 Aframax, with a
combined deadweight tonnage of over 1.3 million tons.
DryShips' common stock is listed on the Nasdaq Global Select
Market where it trades under the symbol "DRYS."
Visit the Company's website at www.dryships.com.
Abour Barry Parker Barry Parker is a financial writer and
analyst. His articles appear in a number of prominent maritime
periodicals including Lloyds List, Fairplay, Seatrade, and Maritime
Executive and Capital Link Shipping.
Investor Relations / Media: Nicolas Bornozis Capital Link, Inc.
(New York) Tel. 212-661-7566 E-mail: dryships@capitallink.com
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