Bulk Carrier Seasonality and Longer Term Trends

I’ve been wondering why the bulk carrier freight market has been uninspiring of late when everyone usually expects it to be enjoying its seasonal peak. Is it something to do with coal? According to commodity reporting service Argus, global coal exports in January-October 2020 stood at 804 Mn T, down from 938  Mn T in the first 10 months of 2019.  I’ve been digging around to see if I can work out what’s going on.

China’s coal output for October was up 1.4% year on year and up 1.7% month on month to 336.6 Mn T, as miners upped supplies in advance of wintry weather. This was the first year on year growth in output since May 2020. During January to October, China has mined 3.13 Bn T of raw coal, up 0.1% annually and down 0.1% on the total for January to September. So, pretty flat then, so it’s hard to say that an increase in coal production is ousting imports.

Domestic coke production in China has risen for four months reaching 40 Mn T in October up 2.2% year on year despite a 1.5% fall since September. Output for Jan-Oct was 391 Mn T, 0.7% lower than for the same period in 2019. Again, pretty flat.

Interestingly, Shanxi, the leading coal mining province, led coal production increases with a 13.9% year on year increase in output for October to 95.4 Mn T, while output for the first ten months of the year was 867.3 Mn T, up 6.1% annually. It would appear that Shanxi is ousting domestic competition or Mongolian overland imports.

As it turns out, China’s neighbours have been reducing their reliance on imported coal.

Japan imported 14.70 Mn T of coal in October, down 5.7% year on year. shipments from ASEAN countries fell 7.0% year on year to 2.12 Mn T and shipments from the US fell 68.9% year on year to 347 k T, while imports from Russia rose 11.6% to 2.49 Mn T.

South Korea’s coal imports fell 33.6% in October to 6.43 Mn T, their lowest level since March this year and 23.7% lower than in September. Year to date imports were 72.5 Mn T, an annual decline of 14.7%.  The biggest loser was Indonesia, from where imports fell 41.2% to 1.36 Mn T, followed by Australia, down 14.2% to 3.11 Mn T and Russia, from where imports fell 27.8% year on year to 14 Mn T.

It was all bad news for Indonesia as October coal exports were 28.02 Mn T, down 30.5% year on year but up 14.7% on September, halting a four month fall and the highest level since March. 

Exports to India were 8.63Mn T in October, but still down 3.9% on September and down 25.3% year on year.  Exports to China were 5.3 Mn T in October, down 60.6% year on year, though up 40.8% month-on-month as Indonesian cargoes replaced Australian cargoes overlooked by China as punishment for Australia’s impertinence in seeking an international inquiry into the origins of Covid-19. According to ship tracking service Kpler, around 50 Australian coal cargoes have been waiting off Chinese ports for weeks. This congestion is not yet affecting freight rates.

Russia’s Industry and Energy Ministry has cut December coal export quotas from Kuzbass to Far Eastern ports and via railway crossings into China by 900 k T to 3.8 Mn T. Russia exported 22.2 Mn T of coal in October, up 6.8% annually and 18.7% on September, and the highest level since April 2019, according to the Federation Customs Service of Russia. However Russian coal exports to China in September fell 4.64% from August to 3.93 Mn T, though this was reportedly up by 38.1% year on year.

All in all, it’s a mixed picture for coal demand in North East Asia, which is creating volatility in overseas coal trade volumes. At least part of the issue has to be an increase in renewables and gas in the energy mix in China, Japan and South Korea.

Perhaps India, the other big importer of coal, will provide consolation to coal traders and to ship operators in the coal business. Covid-19 has severely impacted Indian economic activity but that might now be turning around. Industrial output grew 0.2% year on year in September after six straight monthly falls. The manufacturing sector, which constitutes 77.6% of the index, recorded a marginal contraction of 0.6% in September. Mining and power generation grew at 1.4% and 4.9% respectively.  That increase spurred coal imports which grew 11.6% year on year in September to 19 Mn T.

However, the outlook for coal imports is said to be uncertain as it “depends on the sustainability of operations and growth in consuming sectors in the coming months” according to Vinaya Varma, CEO of mjunction, a j/v between SAIL and Tata Steel. The jump in coal imports for September was led by coke, up to 4.58 Mn T from 3.54 Mn T last year, not thermal coal, which was up to 11.97 Mn T from 11.81 Mn T a year ago. So even a rebound in power generation has yet to spur coal imports.

Meanwhile at this week’s Virtual Coaltrans Asia conference, Rodrigo Echeveri, head of research at Noble Group, suggested that India’s demand is likely to rise by 13 Mn T in 2021 to 164 Mn T although this would still be lower than 2019’s 169 Mn T. 

Moody’s Investor Services has published a report showing that the ‘levelized cost of electricity’ (LCOE) generated by solar and onshore wind plants in India will be equal to that of new coal plants by 2025, as the cost of generating renewables falls by a staggering 16% a year. From 1H 2018 to 1H 2020, the LCOE of new solar and onshore wind generation projects with the same battery capacity dropped at a CAGR of 23-40% in both China and India.

Bloomberg New Energy Finance says that the rapidly falling cost of renewables will send demand growth for coal negative in China, India, Japan and South Korea. My own reviews of national decarbonisation policies in these nations (you can read them at www.ship.energy) suggest that coal’s days are numbered except in China, where a 20 year stay of execution may happen as the coal lobby is so politically powerful.

Winter coal demand in the north Atlantic nations used to drive seaborne coal trade. But as coal has fallen out of favour as generators switch to gas and renewables, Asian nations have driven demand. But now it seems that Asian demand is being hit not only by Covid-19 but by a secular switch to renewables.

Certainly, the coal element of the seasonal peak in dry cargo freight markets is petering out, and longer term seaborne coal shipments look likely to fall. That’s bound to have an effect on freight market index numbers and constituents. I think we can expect further changes in freight patterns, and that may affect the way you think about trading bulk carrier markets, stocks and ships.