Reflecting last year’s dry bulk trade growth setback, doubts about future expansion have multiplied. Some influences resulting in global seaborne dry bulk commodity movements ceasing to grow in 2015 may persist over the twelve months ahead. Confidence in a solid longer-term upwards trend has receded, at least temporarily.

Although a slackening dry bulk trade advance last year was widely expected, it was not generally foreseen that growth would fade away entirely. Based on provisional estimates, which could be revised noticeably, it seems quite possible that overall trade was flat in 2015. Not actually reduced by any meaningful volume, but not visibly increasing either.

This performance contrasted sharply with about 3.5% growth in the previous year which, in turn, had been preceded by several 6–7% annual rises. Currently also, a return to similar expansion rates is difficult to foresee. The factors enabling rapid trade advances have retreated and may not revive, while new sources of large additional volumes are still awaited. So any rise in 2016 seems likely to be small.

Remarkably, the sharp deceleration in the past twelve months was not caused by a severe global economic downturn. More specific factors shaping individual commodity trades were 

influential, although China’s continuing economic slowdown was an underlying reason. Other economies having most impact on dry bulk import demand — USA, European Union, Japan and Korea — mostly performed slightly better than in the preceding year and may continue improving in 2016.

A large reduction in seaborne coal movements last year, after many years of growth, greatly weakened the overall dry bulk trade trend. Coupled with little or no further increase in iron ore trade, and only sluggish rises among other commodities, the result was the weakest achievement since the 2008/09 global economic crisis.

WORLD ECONOMY PERSPECTIVE

During the past year it became possible to discern an improving economic growth trend evolving among the main advanced countries. Although this strengthening was somewhat patchy, it nevertheless contrasted with slowing growth in emerging economies as a group. China’s sustained deceleration was a feature.

Estimates of Gross Domestic Product (GDP), representing goods and services output, published recently by the OECD organization and summarized in table 1, suggested that the annual increase in 2015 for the entire OECD group (mainly USA, EU, Japan and Korea) would edge upwards to 2.0%. This progress reflected more momentum among the main countries. The forecast for 2016 indicated further limited progress to an average 2.2%, based on positive signs for all the principal areas.

Despite a beneficial impact in many countries from much lower oil prices, and support from macroeconomic policies, the OECD organization remains cautious about economic activity acceleration. Slowing emerging market economies including China is one restraining influence. Another factor is subdued investment and productivity growth in the advanced countries. As a consequence “global growth prospects have clouded” according to the OECD’s economists.

In Europe tangible evidence of an economic revival under way began to unfold last year. Expectations of GDP growth picking up seem to have proved correct, although it was a fairly modest achievement. Limited credit availability and further deleveraging (paying down loans) have been identified as contributory factors restraining activity, but these features are not expected to prevent a continued improvement to 1.8% GDP growth in 2016.

Japan’s economy faltered in the second quarter of last year, when a minimal decline in GDP occurred, and seemed to be heading for another ‘technical recession’ (two consecutive quarters of negative change). However, this outcome was avoided when momentum was regained later, and the annual growth rate may have been above the previous year’s very slow advance. More monetary stimulus has been applied, and may result in a higher 1% GDP growth rate this year.

The sustained slowing in China is consistent with many expectations and is also an intentional consequence of government policy aims. A concern for the international community though, is whether the official statistics are correctly measuring what is portrayed as a gradual and controlled process, or whether the slowdown is much steeper. Shifting the economy’s balance away from investment spending and exports, towards consumer spending, is widely expected to cause further slackening in the 2016 GDP growth rate to 6.5%.

STEEL RAW MATERIALS

Patterns of spending contributing to economic activity affect demand for steel and production volumes. Changes in the steel production trend, in turn, influence raw materials consumption and also determine import demand, mainly for iron ore and coking coal, in countries depending on foreign supplies. A large proportion of global seaborne dry bulk trade is comprised of these commodities.

In the past twelve months, steel demand and production in most of the main countries importing raw materials — China, European Union members, Japan and South Korea — experienced weaker market conditions. Developments were reflected in the World Steel Association’s recent estimated steel demand changes, which do not always exactly match actual production variations. Demand for steel in 2015 as a whole was expected by the

WSA to prove marginally higher within the EU, growing by 1.3% compared with the previous twelve months. But elsewhere negative changes were foreseen. In Korea a 1.3% decline was estimated, accompanied by much larger reductions in China (–3.5%) and in Japan (–5.4%).

Indications for 2016 suggested that Japan’s sharp decline could be partially reversed with a 3.1% increase while, in Europe, an improved 2.2% growth rate could be seen. Korea’s steel demand was forecast to return to marginal 0.7% growth. By contrast with these positive signs, in China a continued downtrend was indicated this year, albeit at a slightly less negative –2.2% rate of contraction.

Iron ore and coking coal movements comprise about one- third of all global seaborne dry bulk commodity trade. Last year iron ore trade apparently was about 1% higher, based on tentative calculations, reaching around 1,360mt (million tonnes,) as shown by table 2. Coking coal trade may have been 4% lower at around 305mt.

Prospects for steel industry raw materials global import demand over the twelve months ahead seem rather subdued at present. Although some improvement in several countries’ economic performance may be achievable, benefits for steel demand and production are likely to prove limited. Moreover, expectations for a continued rapid pace of substituting domestic iron ore output in China with foreign supplies have receded.

Most attention in the iron ore trades is focused on China’s imports, because these comprise over two-thirds of the global total. The estimated 2015 China volume was close to the previous year’s 933mt, after rising very strongly over the preceding decade. Until 2014 the upwards trend was driven by expanding steel production, coupled with an enlarging proportion of foreign iron ore consumed, boosted by an advantageous steep fall in international ore prices.

Some potential for global iron ore trade to be strengthened by low iron ore prices is still evident. If more high-cost Chinese domestic mines, many of which produce relatively low-quality material, are eventually forced to cut back output, additional supplies from Australia and Brazil may be required. This substitution could boost imports even when steel production is declining. But uncertainties are prominent.

Unlike iron ore trade, global coking coal trade is not dominated by China. Another contrast is that the total world volume is less than a quarter of the iron ore quantity. Although Chinese imports are a sizeable component, Japan, Indian and European countries as a group are bigger coking coal buyers.

According to provisional calculations, both Japan and China saw declines in coking coal imports last year, amid lower steel production volumes. Meanwhile the EU’s purchases from foreign origins may have been flat or reduced. Conversely, India’s imports appear to have strengthened, reaching an estimated 

51mt, as a result of rising steel production and an intensifying requirement for high quality foreign grades of this coal type.

Currently, signs pointing to growth in this sector during 2016 are limited. India is the main focus, because an upwards trend in steel production seems set to continue, assisted by a robustly performing economy. Although India has large domestic coal resources, the coking coal quality available is generally inferior and quantity is inadequate, ensuring greater dependence on external supplies.

POWER GENERATION FUEL

Seaborne steam (or thermal) coal trade is a much large part of the global coal picture than coking coal movements. Power stations in many countries are the principal importers, but cement producers and other industrial users are also prominent.

In 2015 an unusual change apparently occurred: a lower world steam coal trade total compared with the previous year, down by about 5% at an estimated 820mt, following an extended upwards trend. The principal cause was a steep fall in China’s imports, accompanied by weaker European import demand. A small rise in India’s purchases, together with increases elsewhere, were insufficient to offset the negative events.

Pressure to cease, or at least curtail, coal burning for environmental reasons has become a key influence on coal trade evolution and is having a major impact. In many importing countries, especially China and within Europe, a trend of switching towards cleaner fuels or renewable energy sources, or both, is well under way. This pattern is not universal however, and, in a number of other countries mostly in Asia, the compelling economic advantages of coal are likely to persist.

Sustained support for steam coal consumption and trade is resulting from several factors. In some countries, long-term plans indicate that rapidly rising electricity demand is likely to be satisfied by coal-fired power plants, based on construction programmes to increase generation capacity which are advancing solidly. Growing reliance on imported supplies of coal is often envisaged, even where there is domestic material available.

In the Pacific area there is uncertainty about steam coal imports into Japan, one of the principal buyers, mainly for different reasons. Nuclear generation in Japan, which previously provided almost one-third of electricity requirements, has been virtually suspended since the Fukushima-Daiichi power plant disaster a few years ago. But a process of gradually allowing these power stations to operate again implies some negative effects on coal import demand, which benefited from nuclear closures.

India has become the world’s number one steam coal importer, overtaking China last year, although growth apparently slowed sharply. Estimates suggest that in 2015 India may have received only a slightly higher volume than seen in the previous year, when about 173mt was recorded. A huge coal-fired power plant building programme is progressing, amid a strong upwards power usage trend. Together with effects from difficulties in sourcing sufficient domestic coal, further imports growth is predicted.

China’s steam coal import patterns now present a starkly contrasting picture. After decreasing in 2014, the downwards trend accelerated last year when the previous total of about 190mt may have been reduced by about 30%, taking a massive quantity out of the global market. Slowing energy requirements, a sustained emphasis on cleaner energy sources, and specific measures to curb coal consumption and imports had a dramatic impact, creating much greater uncertainty about future import needs. 

CEREALS AND OILSEEDS

For global seaborne trade in grain, soya, plus other oilseeds and meals, changes are often greatly influenced, at least in the short term, by the impact of varying weather patterns. Weather variations affect both domestic crops in importing countries (with implications for import volumes) and also determine harvests in exporting countries. Changes in consumption trends are influential as well.

Agricultural commodity trade statistics are usually compiled on a ‘split year’ basis, labelled as crop, marketing or trade years. This is a device used to reflect the pattern of harvests around the world, recognizing the nature of production which occurs in ‘lumps’ at set times rather than as a continuous process throughout any period.

Figures for grain (wheat plus corn and other coarse grains), calculated by the International Grains Council, show that global trade in the 2014/15 crop year ending June 2015 grew solidly by 4%, reaching 322mt, a record high total. Larger imports by China, other Asian countries, the Middle East area and North Africa were partly offset by reduced EU purchases.

During the current 2015/16 year now past its mid point, world wheat and coarse grains trade is expected to be about 2% below the previous year’s volume at 314mt, according to recent IGC estimates. Reduced imports into China, and also Iran and other Middle East countries, may contrast with higher shipments into Europe.

The evolution envisaged in the current year illustrates how changes in weather patterns affecting harvests result in short- term import increases or decreases. Forecast weaker imports into China reflect a sequence of good domestic grain crops in the past few years and a build up of stocks (particularly corn). Abundant production in the Middle East is expected to cause a similar imports decrease while, conversely, a corn harvest shortfall in Southern Europe could raise foreign purchases.

Within the soya sub-sector, which has been growing very strongly, different patterns are often evident. Using a marketing year ending in September, global soyabeans and meal trade in 2014/15 expanded by 7%, reaching 182mt, based on US Department of Agriculture data. In the current 2015/16 marketing year a further 5% increase is forecast, raising the annual total to 190mt.

Rapidly expanding soyabeans imports into China have provided the main impetus for the upwards global soya trade trend during the past decade. These imports, which totalled 78mt in 2014/15, now comprise over two-fifths of the world volume and are the dominant influence. Purchases by other Asian countries and elsewhere have also grown vigorously.

In the present year, a slower 3% increase in China’s soyabeans imports is envisaged by USDA analysts, resulting in the volume totalling over 80mt. Dependence on foreign supplies reflects relatively low domestic soyabeans production by Chinese farmers, coupled with strongly increasing consumption of soya meal and oil. Soyameal is a key ingredient of livestock feed, while soyaoil is used extensively in food manufacturing and domestic cooking.

Looking further ahead to the second half of calendar year 2016, prospects for grain and soya trade are, as usual, very hazy. Current forecasts are largely guesses, as predictions of changing and inherently unpredictable weather patterns and their effects on grain and soya production and import demand are not yet plausible. When a more accurate picture is available of mid-2016 domestic harvests in northern hemisphere grain importing countries, forecasting will become more useful. 

VOLUMINOUS MINOR BULKS

Trade in many commodities, some of which are not minor but very voluminous, is included in the minor bulks sector. Consequently this category is extensive and amounts to huge quantities. The diverse range comprises cargoes related to industrial and construction activity, and also agricultural commodity movements. Altogether this group contributes over one-third of global seaborne dry bulk trade.

Within the ‘industrial’ sub-group, steel products and forest products are the most prominent individual elements. Other large components are bauxite/alumina, iron and steel scrap, cement, salt, petcoke plus nickel and other ores. Among ‘agricultural’ minor bulk commodities are sugar, rice, oilseed meals, phosphate rock, other fertilizer raw materials and semi- processed fertilizer products.

Tentative calculations based on very incomplete data suggest that, last year, growth in the entire minor bulks group was marginal at about 1%, raising the total to around 1,530mt, as shown in table 2. At present there is an absence of clear signs pointing to a stronger growth performance during 2016.

Import demand for a number of industrial minor bulk commodities appears to have been restricted by slowing economic activity. Economic growth in emerging market countries has slackened, affecting imports for manufacturing and construction. Other more specific factors also explain changes.

China’s imports of minor bulk commodities comprise a large proportion of the world total. Over the past twelve months, some have experienced negative effects from a continued economic slowdown and its ramifications for many industries and construction activity. For example, nickel ore imports, which totalled 48mt in 2014, appear to have fallen sharply last year, partly reflecting limited availability of foreign supplies, and the weaker trend could continue.

LIMITED GROWTH AHEAD

This overview of global seaborne dry bulk trade’s recent progress and future prospects indicates that a flattening of the preceding robust upwards trend occurred last year. Weak growth in some individual commodity trades and downturns in others were visible. Signs of changes in 2016 point to overall growth resuming, but there are no indications at present suggesting a briskly accelerating performance.  
 
 
Dry bulk prospects for Brazil in 2016 

The collapse of Brazil’s currency is helping to compensate for the sharp fall in the price of many commodities, writes Patrick Knight. This state of affairs will persist in 2016.

Reflecting the country’s very poor economic performance of recent years, as well as the political turbulance of the past few months, the Brazilian currency has fallen by almost 50% against the US dollar and other currencies in the past year.

The weaker currency means that Brazilian goods of all types are much more competitive in world markets than a year ago. This is compensating, at least in part, for the impact caused by the fall in the price of most of the hard and soft commodities whose export now generates three quarters of Brazil’s export earnings.

China is now the leading destination for many of Brazil’s exports, notably iron ore and soya beans, as well as pig iron, pulp, leather and wood. But although China’s need for iron ore has weakened, along with the country’s economic growth, this has not affected the sale of most other goods imported by China.

Although a boom in building infrastructure and housing has slowed, so fewer minerals and the metals which China does not produce are being imported, consumer demand for foodstuffs and most other goods has slowed far less, if at all, as wages continue to rise.

Demand for soya beans by China, the destination of three quarters of the more than 50mt (million tonnes) of soya beans exported by Brazil each year, has not fallen at all. It also seems likely that China will soon join the many countries which import Brazilian maize, of which an all-time record 30mt has been exported 2015/16. Until five years ago, Brazil often imported some of the maize used to feed chickens and pigs. But more maize is now planted as a second crop to soya in the winter months than is in the summer. This trend will continue so long as more soya is planted in the north of the country, which seems inevitable, as demand grows.

Farmers growing grains are amongst those benefiting most from the devaluation. But production costs, which includes imported fertilizer, and equally important, the cost of transport, have risen greatly as well. Many farmers in the frontier areas have large debts set in US dollars, so are aprehensive.

Should the Brazilian economy start to grow again soon, rather than only after several more years of stagnation, something considered more likely, this would cause the currency to strengthen once again. If that happened, and world grain prices did not rise, the financial situation for many farmers would become very precarious. Many farmers would plant less, so less grains would be available for export.

The year 2014 saw significantly more of the soya and the maize grown in the centre west being exported from ports in the north and north east of the country. This followed the building of new terminals alongside the Tapajos and other rivers and the availability of many more barges and tugs to carry them. A few of the roads used to take soya and maize to ports have been improved, but not fast enough to keep pace with increasing output. The cost of road transport will rise even further if the world price of oil starts to rise once again, as seems likely in the long term at least.

Anxious to encourage a switch from road to rail transport, and so ensure Brazil’s crucial soya industry remains competitive, the government wants to attract investors, notably some from China. Finance is needed to build a new line which would link the tracks which now carry Vale’s Carajas ore to the deep water port of Itaqui on the Atlantic, to ports close to the mouth of the Amazonriver. Thisisnowamaindestinationofthebarges taking grains north.

Four of Brazil’s largest trading companies, Bunge, Cargill, Dreyfus and Maggi, have also announced plans to build a 900km railway to link the main soya growing regions of Mato Grosso state, to the fast growing riverside port of Mirituba, now the limit of navigation on the Tapajos river, and also close to the Port of Santarem. Fed up with the slow progress being made to make roads in the region usable all year round, this consortium wants the planned railway, which could cut transport costs by up to 40%, to be completed by 2022/23.

Vale has been hit not only by the sharp drop in the price of ore, which has now fallen below the $40 per tonne mark, but by the possibility that it will be called on to pay up to $5 billion in compensation for the damage caused by the collapse of a dam at the Samarco mine in Minas Gerais. The company has slashed investment planned for 2016, but still expects to start mining ore at its new 90mt a year capacity workings in the Carajas province, in the second half of 2016. The reason for going ahead there is simple. The first ore to come from Vale’s new Carajas workings will cost less than $13 per tonne to mine, and the cost should fall to $10 a tonne a year or two later. Nobody expects the world ore price to fall to anywhere near that level. Even at $40 per tonne, only Vale and the largest companies with mines in Australia, make a profit. Many high-cost mines in China, India, and elsewhere are being closed, many probably for good. Only the very largest are surviving. Vale’s new mine has sufficient reserves to last for many decades.

If prospects for Vale are reasonable, the same cannot be said for Brazil’s steel companies which are now utilizing only about 60% of their 35mt capacity. The industry is facing a crisis which officials describe as “the most serious in its history”. Two large blast furnaces have already been closed down, others will follow, and a dozen mills and lamination plants have shut. Twenty-five per cent fewer cars were sold in 2015 than the previous year, the sale of capital goods fell by a similar amount, with those of white goods not far behind. Construction has slowed as well.

The devaluation has meant that imported steel is now more expensive, so less is coming in. But because there is a world steel surplus estimated at 700mt, some countries, notably China, are continuing to export steel to Brazil, even at large losses. Because of this, Brazil’s steel companies have called on the government to increase import tariffs from the present 8% to 20%. In the past few years, several steel companies with reserves of ore of their own, had boosted their meagre profits by exporting iron ore. But their ore usually costs much more to mine that that produced by Vale, so many have now exited the ore business.

While steel mills are being shut down and farmers are watching the exchange rate closely, the makers of market pulp, most of which is exported, have seen demand remain buoyant. This industry is bucking the trend and is starting a major new round of investments. China is an important market for Brazilian pulp and consumer demand there for all types of goods, including paper remains strong. The devaluation has restored the competitiveness of this industry, while numerous mills in countries where production costs are high, have been closed down. The usually cautious Fibria company, owner of the mills in the Aracruz complex, and also those previously bearing 

the Votorantim name, is moving ahead with the duplication of its Tres Lagoas mill in Mato Grosso. This will add 2.5mt to output there in three years time. Suzano is also embarking on a major de-bottlenecking. The industry was set to export more than nine million tonnes of pulp in 2015, 13% more as in 2014. The Klabin company, the country’s leading producer and exporter of packaging materials and which is part way though a major expansion of pulp making capacity of its own, is not doing so well as the specialized pulp makers. Demand for consumer and other goods in Brazil is weak at the moment after a decade of strong growth, so Klabin is suffering. Brazil has never been able to export paper as successfully as it has pulp, mainly because most paper continues to be made close to where it is consumed.

In 2016, there is likely to be less sugar produced around the world than is consumed for the first time in four years, and the world price has risen slightly to reflect this. But very large stocks still overhang the market, so Brazil’s sugar mills, which almost uniquely are able to make either sugar or ethanol from cane, are facing a dilemma. It is not clear whether some mills will opt to convert more cane into sugar in 2016 than in recent years, or whether they will continue to make fuel instead. Fuel can be sold more easily and quickly than sugar, and with many mills still nursing losses, maintaining a flow of cash continues a priority. By converting more cane into fuel in the past few years, Brazil has exported at least 5mt less sugar than it otherwise would have. This helped prevent prices falling even more than they did.

Amongst the numerous difficulties Brazil has faced in the past couple of years, has been a severe and prolonged drought. Water levels in the reservoirs containing drinking water and generating hydro-electrical power, have fallen to critical levels. This has forced the generating companies to start up high cost gas fired power stations, and even to use elderly stations using fuel oil, or diesel. Although industry has been using less electricity in recent years than it did earlier, the higher incomes enjoyed by millions of Brazilians in the past few years encouraged many to buy air conditioning units. This has resulted in demand for electricity increasing much faster than had been expected.

The price of electricity has been increased sharply to slow demand, and one of the leading users, the aluminium industry, has been hard hit by this. Smelters in Brazil already paid much more for their power than producers elsewhere, notably in the Arab world, where new smelters have been built. China has also invested massively in new smelting facilities, often disregarding market forces in the process. Several of Brazil’s smelters have been mothballed in the past few years and more may shut in the near future. On the other hand, Brazil continues to be one of the world’s lowest cost sources of both bauxite and alumina, so the aluminium industry as a whole in not doing too badly. Even though the future for primary aluminium in the country does not look good. 

 
Samarco dam collapses set to cost owners dear 

Vale and BHP-Billiton, joint owners of the Samarco iron ore company in Minas Gerais, are bracing themselves for massive bills for the damage caused by the escape of millions of cubic metres of waste, following the collapse of two dams at a large mine.

The collapse occurred in mid November, and it took two weeks for up to 50 million cubic metres of waste, some of it accumulated over 40 years of mine operations, to reach the Atlantic ocean, 550km downstream. The water supply of dozens of towns and cities has been contaminated and vegetation damaged, while millions of fish, dolphins and a rare type of turtle have been destroyed.

The 25mt (million tonnes) of ore mined by Samarco each year, is taken to the port of Uba, in Espirito Santo state, along a 400km slurry pipeline, with the ore concentrated into high value pellets at four mills there.

Pellets, rather than unprocessed ore, are preferred by many mills, notably those in urban areas in United States and Europe, as pellets cause less pollution. Most of the pellets traded worldwide come from Brazil and the product is made by Vale as well as Samarco.

It could take up to four years for two dams holding back the lakes into which waste from treatment plants was pumped, to be re-built. The damaged dam was being raised to keep pace with a surge in output of ore when the collapse occurred. The treatment plant was badly damaged when the dam collapsed, as were several conveyor belts, although the mine itself is intact, as is the pipeline, the port installations and the pelletization plants.

Anxious to re-start production as soon as possible, engineers are considering pumping waste into old mine workings from now on, rather than allowing it to settle in lakes.

Samarco has already been ordered to pay stiff fines to the environmental authorities for allowing the burst to happen and towards compensation for damage, both to the environment and to water treatment plants, as waste continues to escape from the mine workings.

As well as forcing numerous towns to seek alternative sources of drinking water, the Cenibra pulp mill, some 200km downstream, which makes 1.3mt of market pulp a year, most exported to Japan, was forced to halt for a week. A group of Indians, whose reserve straddles the Doce river, where the waste is now passing on its way to the sea, has halted trains carrying ore from Vale’s mines in Minas Gerais state, to the Tubarao terminal and Vale’s own pelletization plants there. The Indians claim they have no water to drink and that fishing has become impossible.
 Between them, Samarco and Vale make up to a third of the 200mt of pellets traded worldwide each year, and stand to make substantial losses as the result of the accident.

Brazil’s long-delayed new minerals law, which has been awaiting approval by congress for the past two years, is likely to be considerably tougher than had been expected. Mining companies will have to take out insurance against damage to the environment from now on, a measure which could make mining significantly more expensive in Brazil in future.

Vale and other mining companies have started inspecting the hundreds of dams they own at their mines, many in a dangerous state. There are some 15,000 dams of all types in Brazil, and 16 dams burst their banks just during 2014.

More than 20 people lost their lives during the recent incident at the Samarco mine, virtually all of them apparently men working on the dam itself, who were swept away, along with equipment. Some villages downstream were destroyed, but residents had time to flee.