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.

Contact Information:

Investor Relations / Media:
Nicolas Bornozis
Capital Link, Inc. (New York)
Tel. 212-661-7566
E-mail: dryships@capitallink.com