Long-term demand for dry bulk commodities could be hit by the impact of the Evergrande situation, even though analysts largely agree that the short-term impact of the debt woes of China’s largest property developer has been muted for spot rates. At the beginning of the week, when the debt default crisis became apparent, with downgrades by leading credit ratings agencies that had a knock-on effect on equity markets on concerns of contagion, there was a sell-off in the dry bulk forward freight agreement markets, according to Braemar ACM. The October capesize contract shed some $3,000 in value, hitting an intra-week low of $43,000, while the Calendar 2022 contract dropped by about 5% to under $25,000. But in recent days the near-dated contracts quickly recovered, reaching fresh highs, as an ever-tightening Pacific market continued to propel capesize spot rates skyward, the brokerage said. Despite a rebound in the first-quarter contract, Cal ’22 remained 3% below the highs reached this month, indicating “some concerns remain for demand later in the year”.

“At a time when China is trying to reconcile its geopolitical ambitions with slowing growth rates, we believe that it is firmly in the government’s interests to act quickly to prevent the situation from deteriorating,” Braemar said in a research note. It said more serious risks lie in the longer-term prospect for China’s economic growth if the property sector sees a lengthy slowdown. It is widely reported that the company agreed to settle repayments on a domestic bond, allaying fears.

Braemar added that even if struggling firms are bailed out, tougher conditions for developers “will likely translate to less aggressive expansion, fewer speculative housing projects and a shift in the Chinese economic growth model”. The “multiplier effect” on infrastructure was another key area where the slowdown could impact shipping, it said. “If growth expectations are downgraded, there will of course be a knock-on effect on demand for dry bulk commodities, particularly those relating to construction and heavy industry, such as iron ore,” it concluded.

According to Arrow Shipbroking, the property sector accounts for 30%-35% of steel demand in China, which means if there is a sharp downturn, China’s dry bulk imports will take a hit, particularly those related to steel. However, it is also a significant contributor to the Chinese economy, accounting for about a quarter of the domestic output. It is a sector in which most of the population’s wealth is tied up. “A disorderly collapse of Evergrande and a potential wave of developer failures would have significant economic and social consequences that the policymakers would undoubtedly want to avoid,” it said in a research note. “We believe a more realistic and likely scenario is a managed restructuring in which other developers take over Evergrande’s ongoing projects in exchange for a share of its land portfolio”, meaning construction would continue, with a minimal impact on dry bulk demand, it said.

On the other hand, the property market in China has been slowing for some time now, with a drop in sales leading to lower construction probably felt in the coming quarters. That means China’s demand for construction-related commodities will undoubtedly cool, but not collapse, according to Arrow. BIMCO’s chief shipping analyst Peter Sand echoed similar views, saying that the Evergrande issue is one of concern for longer-term dry bulk demand, given China’s dominance. It signals the peak in housing and infrastructure may be behind us, given that the lion’s share of migration from countryside to the urban mega cities happened in the 2010s, and although more is to come, it will be at a slower pace, Mr Sand said. However, the news does add to changes underfoot in China’s economy and policies over the coming decade, such as easing carbon emissions by 2030 which will likely lead to lower coal imports, combined with weakness in steel production and consumption, he said. “The easing of China’s growth rates won’t put a dramatic end to the current strong freight levels, but a gradual slide can be expected” going forward, he added. Part of the strength in the dry bulk market at present can be attributed to pandemic-related inefficiencies causing capacity to be snarled up in congestion outside ports in China, at a time when global economies recover from the pandemic.