Bulk Ports, Terminals & Logistics 2012, 20-22 May 2012, Amsterdam, The Netherlands

Global short and medium term demand outlook for major dry bulk commodities

Olle Östensson, Caromb Consulting

Bulk Ports, Terminals & Logistics 2012, 20-22 May 2012,

Amsterdam, The Netherlands

Outline of presentation

• A weak recovery• New recession in developed countries • Considerable downside risks• Slower growth in emerging countries• Iron ore• Coal• Grains

A weak recoveryIMF reduced its projections in January and raised

them again in April(annual rate of growth in GDP)

Source: IMF, World Economic Outlook, April 2012

2007 2008 2009 2010 2011 2012 2013

-6

-4

-2

0

2

4

6

8

10

WorldAdvanced economiesEmerging and developing economies

The imbalances that contributed to the financial crisis are still here, and they

are growing largerChina’s current account surplus, per cent of advanced

countries’ GDP

Source: IMF World Economic Outlook Database

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Limits to growth in developed countries

• United States: – Jobs growth “out of sync” with recovery– Need to reduce budget deficit in medium term

• Euro area– Questionable management of debt crisis– Effects of fiscal austerity– Bank deleveraging

• Japan – Loss of income from earthquake and tsunami damage– Higher energy costs– Need to reduce debt levels in the medium to long term

The largest risks are in the Euro area: the base case is mildly

optimistic

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-8

-6

-4

-2

0

2

4

GDP changeInflationGovernment net lending/borrow-ing, % of GDP

Source: IMF World Economic Outlook Database

Government debt is expected to stop growing as % of GDP

2009 2010 2011 2012 2013 2014 2015 201674

76

78

80

82

84

86

88

90

92

Source: IMF World Economic Outlook Database

But there are alternative, worse scenarios:

If concerns about fiscal sustainability force a more rapid fiscal consolidation, demand would fall. Bank losses on sovereign debt

holdings and on loans to the private sector would lead to tightening credit

2012q1 2013q1 2014q1 2015q1 2016q1

-4.5

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

WorldEuro area

Source: IMF, World Economic Outlook Update, January 2012

Deviation from base case, quarterly change in GDP

Emerging economies are losing steam

• The Euro crisis, together with slow recovery in the United States, means that demand for emerging economies’ exports is growing slowly

• Domestic overheating requires cutbacks in government expenditure (or should do so)

• Higher oil prices squeeze growth

Slowdown in China – although still solid growth

Source: IMF World Economic Outlook Database

• Inflation now appears to be under control

• Housing boom is slowing down

• But China is entering a period of economic reorientation with more focus on consumption, less on exports and investment

• Export markets are not growing as fast as before, and production costs are rising in China

• For demographic reasons, growth will be slower (the labour force stops growing in 2015)

20012003

20052007

20092011

20132015

2017-2

0

2

4

6

8

10

12

14

16

GDP growthInflation

Similar outlook for India

Source: IMF World Economic Outlook Database

• Growth in India may be constrained by government spending and reluctance to remove domestic obstacles to competition and growth

20072009

20112013

20152017

0

2

4

6

8

10

12

14

GDP changeInflation

20072009

20112013

20152017

-6

-5

-4

-3

-2

-1

0

1

Government net lending/borrow-ingCurrent account balance

…and for BrazilInflation is the main threat to growth and the government needs to restrain spending

Source: IMF World Economic Outlook Database

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-1

0

1

2

3

4

5

6

7

8

GDP changeInflation

Oil price increases: how much of a break on growth?

• Inflationary tendencies mainly in emerging and developing countries, where energy accounts for a larger share of consumption

• Much less impact in developed countries, where there is still much more slack and lower inflation expectations

• However, the recovery is fragile and a surge in oil prices, brought on by geopolitical factors, could bring it to a halt

Oil supply: No need to worry(?)

20082009

1q2010

2q2010

3q2010

4q2010

1q20011

2q2011

3q2011

4q2011

1q2012

2q2012

3q2012

4q201226

27

28

29

30

31

32

Call on OPEC crude (total crude demand minus non-OPEC production), Million barrels/day

Source: International Energy Agency: Oil Market Report, 14 March 2012

Conclusion on the macro-economic outlook

• The recovery is under way, but it is weak and fragile

• The greatest risks are in the Euro zone, where too much austerity combined with bank deleveraging could trigger a downward spiral – and where Greece might drag other countries with it when going down

• Emerging economies have their own problems and cannot be relied on to pull the world economy into strong growth

Short term outlook: Iron ore (1)

• World steel production increased by 5.5 % in 2011; the rate of growth will be slower this year, at 3-4 %

• China will – again – have to account for most of market dynamism.

• In spite of the expected economic slowdown, Chinese steel demand will grow by at least 4.5 % this year

Crude steel: World monthly production, Mt

Source. World Steel Association

January 2008

June

NovemberApril

Septem

ber

Febru

ary July

December

May

October

0

20

40

60

80

100

120

140

Short term outlook: Iron ore (2) • Chinese crude steel production was a

record 684 Mt in 2011 (increase by 9 %). The rate of increase is slowing, but production will approach 715 Mt this year

• Iron ore imports increased by 11 % in 2011, helped by more flexible pricing

• Inventories increased in 2011, probably by about 15 Mt – but have declined in the first half of 2012

• Domestic iron ore production (run of mine ore) increased by 24 % in 2011. Ore grades declined precipitously, however, and if converted to standard grade, production was probably constant - despite high prices

• Chinese iron ore imports in 2012 will exceed 700 Mt and probably reach 725 Mt

China: imports’ share of iron ore use growing

Sources: World Steel Association, China Metallurgical Newsletter, TEX Report

January 2008

Septem

berMay

January 2010

Septem

berMay

January 20120.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Iron ore importsCrude steel production

Short term outlook: Iron ore (3)

• Chinese imports up by 40 Mt in 2012• Imports in rest of world up by maybe 30 Mt, with

increases mainly in Asia (Japanese imports fell by 8 Mt in 2011 and will bounce back as reconstruction gathers speed) and North America

• Total rise in seaborne trade of 70 Mt in 2012 – about the same as in 2011, but more equally distributed.

The longer term

19941996

19982000

20022004

20062008

20100

5

10

15

20

25

30

increase gdp

increase crude steel production

Two tendencies will influence Chinese iron ore imports:• Falling steel intensity

as the economic reorientation gets under way

• Increasing share of imports as domestic mines are forced to close

Sources: IMF World Economic Outlook Database and World Steel Association

Short term outlook: Coal (1)• The focus is still on Asia, but US thermal coal exports are increasing as coal

gets pushed out by gas on the domestic market. As much as 70 Mt of coal could get squeezed out, with a portion being exported, contributing to depressed prices in the Atlantic basin. Most of the export increase took place in 2011 (+10-15Mt).

• Due to the uncertain economic outlook, demand is weak in Europe• China’s imports of both thermal and metallurgical coal fell in 2011, but

increased in Q1 2012• Japan’s imports also fell in 2011 – electricity from closed down nuclear

reactors was replaced by natural gas rather than by coal – but recovered in Q1 2012

• Indian imports of thermal coal are growing rapidly, due to failure to increase domestic output

Short term outlook: Coal (2)Imports into China and Japan declined in

2011, but will pick up in 2012, imports into India growing

China India Japan China India Japan2010 2011

0

20

40

60

80

100

120

140

160

180

200

MetallurgicalThermal

Short term outlook: Coal (3)

• Thermal coal demand in Asia is expected to recover in 2012, helped by low prices

• Elsewhere in the world, slow economic growth is limiting demand

• Exports from Australia and Indonesia are expected to pick up• Total growth in thermal coal trade in 2012 is expected at

about 60 Mt, almost all in Asia• Demand for metallurgical coal will follow steel demand,

growing by 3-4 %• Seaborne trade will grow by more, close to 10 % or 25-30 Mt,

because of strong increase in imports into China and India• As a result, seaborne trade of coal is likely to increase by 85-

90 Mt in 2012

Short term outlook: Grains (1)World grain production and consumption, Mt

• The forecast is for record harvests in both 2011/2012 and 2012/2013

• A large portion of the increase will be accounted for by feed grains

• The growth in industrial consumption is expected to slow down as ethanol demand stalls in the US

Source: International Grains Council: Grain Market Report, 26 April 2012

Is the food crisis over?

2006/07

2007/08

2008/09

2009/10

2010/11

2011/2012

2012/20131,400

1,450

1,500

1,550

1,600

1,650

1,700

1,750

1,800

1,850

1,900

ProductionConsumption

Short term outlook: Grains (2)

• Trade volumes are expected to increase by 15-20 Mt in 2011/2012 and to continue increasing in 2012/2013

• Stocks are forecast to stay flat, at levels that do not raise immediate fears about food security

Source: International Grains Council: Grain Market Report, 26 April 2012

Grain trade and stocks

2007/08

2008/09

2009/10

2010/11

2011/2012

2012/2013

0

50

100

150

200

250

300

350

400

450

TradeStocks

Overall conclusions

• Assuming that the macro-economic risks are managed...

• 2011 will see significant growth in dry bulk commodity trade, with total volume increasing by 180-190 Mt

• Iron ore and coal each contribute almost half of the increase, and China alone accounts for roughly half the additional trade

THANK YOU!

olleostensson@gmail.com