Growth in dry bulk commodity imports into and exports out of China in the first half of 2016 are “nothing short of extraordinary,” according to a recent report from the Baltic and International Maritime Council (BIMCO). But “the devastating freight rate levels” in the same period “highlights that something is very wrong in the dry bulk shipping market. The market is nowhere near balanced,” concluded the report from the shipowners group.

BIMCO’s data on seaborne iron ore imports into China, shows growth of 9.6 percent for the first half of 2016 compared to the same period last year. Seaborne coal volumes shipped into China grew by 5.0 percent in the first half.

Chinese steel production and exports elevated imports of iron ore, the report noted. Steel exports were up by 9.4 percent in the first half. Trade barriers being set up against imports of Chinese steel, primarily in the western hemisphere, have had little impact since most Chinese steel is exported to other Asian countries.

The Brazil-to-China trade lane has benefited the most from the higher demand in China for iron ore. Shipments were up by 24 percent to reach 98 million tons in the first half of this year.

Growing iron ore imports are not reflected in higher steel production in China. “We can conclude that some of the much needed substitution away from domestically mined, poor quality ore towards the import of higher iron content quality ores,” the report said.

Such a development used to mean much higher freight rates, but “spot rates for capesize ships were only modestly buoyed by volume growth on this trade.” BIMCO believes that a significant part of the iron ore has been transported on Chinese-owned very large ore carriers (VLOCs). If that continues, volume growth on the Brazil-to-China iron ore trade “will no longer affect the spot market on this trade nor the general freight market significantly.”

Freight rates generally saw the worst quarter ever in the first quarter of 2016. Year to date, the Baltic Dry Index was down by 26 percent on last year’s performance, which was itself highly disappointing.

As of August 10, the BIMCO report noted, “freight rate levels are merely covering operational expenditures (OPEX), with no contribution to cover overhead and financing costs. BIMCO expects the industry to be lossmaking for the full year.”

The freight rates have hit asset values for dry bulk ships. A 2010-built capesize ship was valued in August 2014 at $49.75 million is now worth $21.25 million, representing a 57.3-percent loss of value. According to the report, “the pain is felt across the fleet.”

On the supply side, 31 million deadweight tons (DWT) of new capacity entered into the fleet since the beginning of the year. The fleet’s order book is down to 110 million DWT, a level not seen for nearly a decade. “The fleet will not stop growing unless an equal amount of capacity is demolished at the same time,” the report noted.

So far in 2016, 23 million DWT has been taken out of the fleet and sold for scrap, leaving a net growth rate in capacity of 1.1 percent as of early August. “The dry bulk industry is faced with the lowest earnings ever, with overcapacity being the main problem and demolition the silver bullet,” the report argued. “Difficult as it is to part with your ship, it’s what the industry needs the most.”

The growth in capacity, despite market conditions, is expected to continue for the rest of the year.