Uob Kay Hian

Latest News Update About Uob Kay Hian: Ii was only a few short years ago that China, for the first time in its modern industrial history, seemingly overnight made the grand transition to net exporter of steel from net importer. And in recent years, overseas iron ore miners and oceanborne shippers have hit paydirt, riding on the back of China's phenomenal ascent to become the world's biggest steelmaker and iron ore importer (thanks in large part to the low Fe content of domestically-mined equivalents).

In fact, seaborne cargo rates from Brazil, India and South Africa to China (and to a lesser extent from Australia given the relative proximity) were in fact the chief culprit behind the shocking annual price increases China paid since roughly 2003.However, as far as cargo shippers are concerned, the recent financial crisis has severely rocked the boat.

The ongoing global economic malaise, coupled with Chinese steelmakers' newfound hyperdependence on external demand, has hit commodity firms and the shipping companies that move their products across oceans especially hard.

Several erstwhile iron ore mining behemoths like Australia's BHP Billiton (BHP: 82.74 0.00 0.00%) and Rio Tinto (RTP: 0.00 N/A N/A), as well as Brazil's CVRD, have become low hanging fruits for cash-rich Chinese SOEs to pluck at will.

But while non-Chinese shipping firms are not seeing the white-hot M&A interest from Chinese firms that is visited upon the miners, they are still facing a dire situation due to the rapid slackening in China's demand for higher quality imported iron ore.

In fact, Credit Suisse (CS: 44.60 0.00 0.00%) said in a report on Thursday that global dry-bulk shipping lines need an "unprecedented" surge in Chinese iron-ore imports to fully use their expanding fleets.

The Swiss banking group said Chinese imports of iron ore � the chief raw material used in the production of finished steel � are expected to decrease over the next several months.

Credit Suisse said the global dry-bulk fleet should rise 6.9% this year, as shipyards deliver vessels ordered during a trade boom that ended last year.

The new ships will enter service as Chinese iron-ore imports, a key market for bulk lines, head for declines because steelmakers are working through inventories, the report said.

Experts elsewhere agree that the near-term future is bleak. "Imports of iron ore will fall in the near future. We will see a widening gap between demand and new ship deliveries in the second half," Bloomberg cited Jack Xu, an analyst at Sinopac Securities Asia Ltd in Shanghai, as saying this week.

The Credit Suisse report went on to say that in order to utilize the expanded fleet, full-year Chinese iron-ore imports would need to rise 63% from 2008.

That would mean an average rate of 67 million tons a month for the rest of the year. Instead, the monthly shipments could average as much as 52 million tons, under the Swiss bank's most optimistic forecast, or as little as 42 million.

The bulk fleet is set to surge as shipyards are working through orders with a combined capacity of 68% of the existing fleet, according to data compiled by Bloomberg. Overall global dry-bulk shipping demand will likely fall 3.4% this year, Credit Suisse concluded.

UOB Kay Hian is also hardly sanguine on any sudden turnaround in Chinese steel mills' demand for imported iron ore, and the blessings that brings to global cargo shippers.

This week, it reaffirmed its "underweight" recommendation on regional dry bulk shipping. It said the Baltic Dry Index (BDI) will likely reverse on China's lower iron ore imports and easing port congestion, thus hitting shippers' margins.

UOBKH said China's iron ore imports have been rising sharply in the last 3 months (Apr 09: +33% year-on-year to 57mt) despite its sluggish crude steel production growth (Apr 09: -2.8% to 43mt).

"This was mainly because traders were stockpiling iron ore in anticipation that prices would rise (according to the China Iron and Steel Association). This has led to a near record high iron inventory of 70mt, resulting in many ore carriers congested at Chinese ports," the note said. e