* Slowing China growth hurts bulk commodities
* Iron ore, coal, steel prices fall
* Dry freight sector reels from oversupply
By Jonathan Saul and Fayen Wong
LONDON/SHANGHAI, Aug 2 Many shipping firms and
bulk commodities traders have a piece of advice for anyone who
thinks the world economy may be headed for an upturn soon, led
by Chinese industry.
Take a sober look at the slide in iron ore, steel and coal
For markets reeling from the euro zone crisis, sluggish
economic prospects in the United States and worries over China's
growth, trends in dry bulk commodities trade look ominous.
Iron ore and steel are leading indicators as they detail the
expected pattern of industrial demand in vital sectors such as
construction and carmaking, while coal highlights power usage,
especially in factories.
"It is troubling for the market that demand for the two main
commodities - coal and iron ore - is sliding now and has done so
for some time now," said Peter Sand, chief shipping analyst with
trade association BIMCO.
"The key importer, China has seen declining steel prices
drop more sharply in the past one and half months. This is bad
for steel demand and thus also for iron ore and coking coal
imports, which are not expected to rebound any time soon."
Data on Wednesday showed China's official factory purchasing
managers' index (PMI) fell to an eight-month low in July.
"Western economies are showing really bad signs and China
had managed to hold its own, but is having issues now," said
George Lazaridis, head of research with Greek ship broker
China, the world's second-biggest economy, consumes the most
iron ore, steel and coal, which helped fuel commodity market
rallies for a decade, creating a bonanza for many of the
countries and companies that supply it.
But after almost 10 years of growing at about 10 percent a
year, China's economy is slowing.
Prices for steel-making raw material iron ore have fallen by
about 15 percent in the past three weeks - the fastest decline
since Oct. 2011. Steel prices have fallen by about 10 percent in
the last three months .
Business in these sectors is so slow some traders are glad
they can fill the empty hours by watching the Olympics on
"As the world economy slows down, it is dragging down coal,
iron ore and steel prices with it," said Denny Sabah with
trading house Ronly.
"There is very little to be positive about in Europe, and
the steel, coal and iron ore industries know and feel it. The
bad trading environment at least gives people more time on their
hands to watch the Olympics."
The slump in commodities prices has forced mining giants BHP
Billiton and Rio Tinto to cut
costs, with BHP expected to report its first drop in annual
profits since the 2008 financial crisis, while the latter said
it was cutting staff in Australia and closing its Sydney office.
Sagging steel demand forced steel mills in Europe first, and
then globally, to cut their production severely in the last few
months and this, together with high level of stocks at ports, is
expected to have a direct effect on iron ore demand.
Exacerbating the situation, steelmakers in China, which have
in the last few years been voracious iron ore consumers, are
stepping up maintenance in an effort to cut production and stem
losses from the slump in steel prices and surge in inventories.
This could heap further pressure on iron ore and coking coal
"Historically, a sharp drop to these levels was followed by
a rapid rebound, but the fundamentals also remain negative for
iron ore prices," said Cameron Hunt, iron ore director at the
Metal Bulletin Iron Ore Index .
"Stocks of the material at ports in China remain close to
record highs, and steel demand remains muted."
Market sentiment for coal, especially thermal coal used for
power generation, remains the most bearish on the commodities
complex, with traders and analysts expecting prices to fall even
further before a possible recovery in the fourth-quarter.
"There is way too much supply at the moment and the strong
hydro-power output has made things worse," said Peter Yao, an
analyst with Bank of China International, adding that China was
looking around 700 million tonnes of excess capacity even before
taking imports into account.
"Prices can only start to rebound when the hydro power
season ends in around September. Since Chinese power plants
usually start their winter restocking in around October, that
could be a crucial turning point for coal."
Coal traders are also afraid that large-scale defaults by
some of China's key coal importers would trigger another sharp
fall in international prices.
Two major importers, which together buy around 16 million
tonnes a year, have halted shipments after local banks froze
their credit lines, traders said.
With many of these firms highly leveraged, traders are
beginning to question if these Chinese traders can survive this
price rout, which will likely get worse before it gets better.
"There's a lot of speculation in the market that some of
them may go bust. That will hit Indonesian miners with term
contracts and traders with spot volumes. It will bring out a lot
of distressed cargoes," said a Singapore-based trader.
Global coal prices are now hovering at a two-year low, with
Asian benchmark coal at about $88 a tonne, having slumped 20
percent since April.
The fallout is expected to worsen conditions for the freight
sector with iron and coal amounting to around 60 percent of all
dry bulk transported by ships. Some analysts are now expecting a
sustained recovery in dry freight to only come in 2014.
"I don't think we will be able to see growth levels which we
would like in dry bulk trade. That's why it will take a lot
longer for a full recovery and a rebalancing of demand and
supply in the dry freight market," said Intermodal's Lazaridis.
Under the gun for four years, the dry freight market still
has a glut of ships ordered when times were good.
"The dry bulk market will not be able to handle a sustained
slowdown in global and Chinese growth simply because too many
vessels currently exist and so many more are on their way," said
Jeffrey Landsberg with consultancy Commodore Research.