Perhaps lost in the fog of seemingly endless earnings reports, Rio Tinto (RIO) and BHP Billiton (BHP) in the past two days posted results that once again underscore China's insatiable demand for imported iron ore. On the micro level Rio Tinto's first-half 2016 production figures were much more pleasing to the market than BHP's, owing to an industrial accident at a BHP facility at the Samarco mine in Brazil late last year. On a macro level, however, there is no doubt that demand remains strong, and in the iron ore game, that means China.
Iron ore's primary industrial use is in combination with coal in the Bessemer process to produce steel. Clearly, China's demand for steel, which the market seemed to be pricing at "zero" during the January-February commodities crash, has remained resilient.
Thomson Reuters Commodity Research and Forecasts notes that China's iron ore imports rose 9.1% in the first half of 2016 from the same period a year ago to 493.7 million tons. Reuters also forecasts that China will import 92 million tons of iron ore in July, the highest rate in 2016. At the same time, domestic iron ore production has clearly declined in the Middle Kingdom, with government data pegging the production decline at 150 million tons over the last 18 months.
So, there's a recurring theme to China's commodity trade balances. Domestic production down materially; imports up strongly. China's oil imports rose 14% in the first half of the year while domestic production fell 4.6%. The story is the same in coal, as imports rose to a recent high of 21.75 million tons in June, while domestic production is projected to decline 280 million tons for all of 2016.
Is China giving up on producing its own commodities? No, but clearly the Chinese government wants to reduce overcapacity that was caused by the easy-money policies of the last decade. The smaller producers are being rationalized -- whether their managements want that or not -- and that applies just as much to steel production as to supply of its raw materials.
So, Chinese economic growth may be moderating at a reported 6.7% pace, but that's still the fastest-growing major economy in the world, by far. The decision to remove some lesser-performing domestic producers (actually the same thing is happening in U.S. shale oil and gas) is just capitalism in action, brought to you by a Communist government.
The way to play this shift in attitudes is easy, and those who read my columns on Real Money probably already know where I'm going with this. Coal, iron ore and oil (and grain, by the way, as there's been no sign of a slowdown in Chinese food consumption) all must be transported to China by one means: ship. Therefore, once again, I'm going to trumpet the virtues of the dry bulk shippers.
Freight rates for oil are showing their normal seasonal summer slowdown, but there has been no such move among dry bulk freight rates. The Baltic Dry Index closed yesterday at 746, a remarkable recovery from its 30-year low value of 290 reached just after the "Dimon Bottom" in February. Dry bulk shipping companies were left for dead, but, as the Chinese data show, underlying demand is still strong.
The Series G preferreds of Navios Maritime Holdings (NM) remain my Real Money Best Idea and if you look a couple inches to the right on this page you'll see those securities have risen sharply (the calculations are delayed by a day) since I recommended them in January. I'm still buying them both the Series G and Series H preferreds for clients whenever I get the chance.
Rocketing from 14 cents on the dollar to 22 cents on the dollar still leaves plenty of upside to face value, and I'm going to keep accumulating Navios' preferreds until the ratio is much closer to 1:1.
