Dry bulk watches Evergrande liquidation after 16.5% drop in real estate investmen

“China’s property market is estimated to account for approximately 35% of the country’s steel demand. It is an important driver for economic growth and raw materials like iron ore, coking coal, wood, and cement. Overall, the Chinese economy is a significant driver of dry bulk and more than 35% of dry bulk volumes are destined for China,” says Filipe Gouveia, Shipping Analyst at BIMCO.

On 29 January, a Hong Kong court mandated the liquidation of China Evergrande Group, a major property developer burdened with debt of more than USD 300 bn. This development could further erode investor confidence and worsen the outlook for China’s real estate sector. In 2023, investment in real estate declined by 16.5%, even as the economy grew.

The court’s mandate was issued in response to Evergrande’s failure to present a viable restructuring plan. Yet, Evergrande may still appeal, and it is still uncertain whether the ruling will be accepted by the Chinese courts.

The Chinese real estate crisis began in 2020.  The government stepped in to curb soaring debt levels and since then, Evergrande has been at the forefront of the crisis. It has significantly impacted construction activity, with floor area of new real estate dropping to less than half of what they were before the crisis.

Over 85% of China’s steel is manufactured in blast furnaces which use iron ore and coking coal as raw materials. Given China’s depleted iron ore resources, the country relies heavily on imports, importing 73% of global seaborne iron ore volumes.

“Despite the property crisis, Chinese steel production increased in 2023 due to higher steel exports and strong demand from car manufacturing. Consequently, both iron ore and coking coal shipments strengthened, leading to stronger freight rates for capesize ships,” Gouveia says.

In the short term, the outlook for Chinese dry bulk imports seems stable. Both exports and car manufacturing could continue to support steel production in China, while iron ore inventories are down 7% y/y. Furthermore, Evergrande’s Chief Executive has asserted that current housing projects will be delivered.

“In the medium term, the outlook for the dry bulk market, especially for the capesize segment, will depend on how China manages the liquidation of Evergrande. Some believe that Evergrande will be allowed to fall with negative impact on home buyers, financial institutions, economic growth, and iron ore demand. We believe that at least some of the negative effects will be mitigated by the government,” says Gouveia.

Source: BIMCO