Global short and medium term demand outlook for major dry bulk commodities Olle Östensson, Caromb Consulting Bulk Ports, Terminals & Logistics 2012, 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 recovery IMF reduced its projections in January and raised them again in April (annual rate of growth in GDP) Source: IMF, World Economic Outlook, April 2012

The imbalances that contributed to the financial crisis are still here, and they are growing larger China’s current account surplus, per cent of advanced countries’ GDP Source: IMF World Economic Outlook Database

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 Source: IMF World Economic Outlook Database

Government debt is expected to stop growing as % of GDP 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 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)

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

…and for Brazil Inflation is the main threat to growth and the government needs to restrain spending Source: IMF World Economic Outlook Database

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(?) 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

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 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

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 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 Q 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 Q 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

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

Short term outlook: Grains (2) Trade volumes are expected to increase by 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

Overall conclusions Assuming that the macro-economic risks are managed will see significant growth in dry bulk commodity trade, with total volume increasing by Mt Iron ore and coal each contribute almost half of the increase, and China alone accounts for roughly half the additional trade

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