The global steel and shipping industries have for years been locked in a tight embrace. Iron ore and coal, key raw materials for making steel, are among dry bulk shipping companies' most important cargoes.
Now, an oversupply of both ships and steel has turned that relationship toxic. Both industries need to eradicate overcapacity quickly -- or risk repercussions far beyond their respective shareholders, bondholders and lenders.
Surplus capacity also threatens to undermine central bank efforts to prop up the global economy. Until it's eradicated, companies in the crucial industries like steel and shipping won't feel the need to invest because they won't see a possibility to generate a return; and near-zero interest rates therefore won't have the desired stimulus effect.
So, like their peers in the oil and mining industries, shipping companies and steelmakers need to cut capacity, and fast. But the chances of that happening look slim. Instead, signs of stress abound.
Global steel prices remain weak, and the Baltic dry shipping index -- a measure of the cost of shipping bulk commodities -- is at the lowest level since it was first compiled in 1985.
Steel and shipping stocks have been crushed and companies have been forced to bolster their balance sheets. ArcelorMittal, the world's largest steelmaker, announced a $3 billion fundraising this month. In dry bulk shipping, Norway's Golden Ocean Group on Friday raised $200 million in a share sale to meet lenders' demands.
What's gone wrong? Steel and shipping companies were both guilty of over-investment in the boom years, spurred on by near-insatiable demand from China, which accounts for two-thirds of global iron ore imports.
Source: Bloomberg