Cape fear

Capesize spot rates and the share price of dry-cargo shipowners are facing a new danger as China prepares to axe VAT on domestic iron ore, a leading analyst warns.

After seeing iron ore imports race up 19% in the first quarter the Communist party will remove a 17% levy on domestic ore to safeguard local jobs, says Martin Sommerseth Jaer of Arctic Securities.

In a note to clients, Jaer explains the protectionist measure will bring weaker freight markets and see share prices again under pressure.

He said: “We view this as the most imminent danger for the dry-bulk freight market, as we expect such a move will result in lower iron ore chartering activity to China, and Chinese steel mills again increasing their usage of domestic ore.”

Jaer tells TradeWinds there is no guarantee Chinese authorities will drop the tax. But China has form in the area having previously placed a 130% export tax on fertilizer to support its farmers and also removed export taxes on steel to aid domestic producers, he says.

“The Chinese have a huge incentive to remove this VAT to support a labour intensive industry,” Jaer said.

“This is a warning to be ahead of the curve. As ore price negotiations are going on as we speak I wouldn’t be surprised if this happened sooner rather than later, meaning within a month or so.

“If I were a Chinese policy maker I would definitely make this move.”

In his quarterly dry-bulk update, Jaer says with a newbuilding delivery tsunami approaching, removal of 40% of the dry-cargo orderbook and the scrapping of all bulkers over 20-years-old by 2013 is the only way to prevent a prolonged downturn in the sector.

He believes around 30 million dwt of the existing 295 million dwt orderbook has already been cancelled.

“Recent stimuli packages in South Korea aimed at the struggling ship building industry will likely result in more cancelled orders being built and struggling yards surviving,” Jaer said.

“We view this as the biggest danger for the long term supply demand balance in shipping, if both the Japanese and Chinese governments initiate similar policies.”

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