The reports of coal’s death are greatly exaggerated
The coal industry is without doubt under heavy pressure these days. Investors are pulling out of coal related companies in fear of association, whilst local pollution together with global warming, is affecting the public’s and policymakers’ attitude towards coal negatively.
In 2015 alone, the global seaborne trade of coal totaled close to 1.2billion tons, and constituted 24% of global dry bulk volumes. Coal is thus a very important commodity for the dry bulk industry and has a big impact on vessel earnings.
Graph: Overview of the global seaborne trade, 2015
Based on the growing negative public attitude towards coal, one might be under the impression that we are in the midst of a sharp decline of global coal consumption and trade. Predictions made by energy agencies such as the International Energy Agency (IEA) argue the contrary. In fact, renewable energy will in IEAs most optimistic scenario only cover 22 % of the total global energy demand in 2020. In the same scenario, which is the worst case scenario for global coal consumption, coal is only expected to decrease 5% compared to 2013 levels.
We estimate that the global trade of coal (coking, lignite and thermal) contracted with 6% in 2015, the first year with negative Year on Year (YoY) growth in our time series going back to 1990. The main reasons for negative growth was sharply lower coal imports in China (-87Mt) and in the U.K (-17Mt) which overshadowed growth in India (+8Mt) and the rest of the world (+5Mt).
Global seaborne volumes continued to trend lower in the first 4 months of 2016 (-2%), but since May, the YoY growth is back in positive territory.
The turnaround has been led by China and the Emerging Asia together with a stabilization of Indian coal imports, and the fact that U.K. coal imports cannot fall much more as the base is already very low. Over the course of the next six weeks, we will take a closer look at the drivers currently affecting the global seaborne trade of coal. This week, our focus will be on China:
China – will the current positive trend in coal imports continue?
The growth potential in Chinese thermal coal demand is expected to be limited going forward as the overall economic growth is slowing and as electricity generation from thermal coal will be under pressure from alternative energy resources. However, as less than 5% of Chinese coal consumption came from the seaborne imports in 2015 there is definitely growth potential for seaborne imports even in a scenario of flat or negative overall demand.
The Chinese government has stated that they want to get rid of the overcapacity in the coal and steel industry in order to lift the profitability and viability of these industries. In Q4-2014 the Chinese government took the first real steps in achieving this within the coal industry, by curtailing the massive domestic raw coal production with 17% from the same period in 2013. At the same time severe coal import restrictions were put in place to ensure that lower domestic production was not simply replaced by higher imports. This led to a negative YoY growth in Chinese seaborne coal imports of 24% within this quarter.
Domestic coal production continued to slide in 2015 (-5%) while imports of 170Mt were down a massive 30% from the previous year. The domestic production cuts have been accelerated further to -11% in the first 8 months 2016 by a new 276 days working policy implemented in April this year. The rapid fall in domestic coal production and domestic coal inventories has led to an undersupplied coal market and rapidly increasing domestic coal prices (thermal coal price is up close to 50% this year and coking coal prices has more than doubled).
With much higher coal prices virtually all coal producers in China are making money and consequently the Chinese government has allowed coal imports to grow again. Chinese seaborne imports between May and July 2016 were up +17% YoY and were up a massive 48% in August. Coal prices have increased to such a high level that the problem for the government is no longer how to increase the profitability of the coal producers but rather how to avoid higher coal prices from translating into higher power tariffs which could slow down an economic recovery.
Thus, new policies have been released by the Chinese government in the last week which will allow 74 approved mines to increase their output collectively with 1.0Mt per day if the coal price stays above a threshold of 490 Yuan per ton for more than 2 weeks. Such a ramp up annualizes to 276Mt under a 276 days working policy. Chinese coal production in August was down more than 400Mt in annualized terms, so we do not think these increases are quite enough to bring the Chinese coal market fundamentally back in balance. However, as we are approaching a seasonal lull in thermal generation, it might be enough to bring the market back balance in the short term. These recent moves illustrate how the Chinese government has a tough balancing act between getting rid of overcapacity in the coal industry without harming a wider economic recovery. Going forward, we expect Chinese coal imports to be highly dependent on government policies, and we thus expect imports to be volatile.
Next week we will look at the Indian coal market, where demand is expected to grow at a steady pace, while there is high uncertainty related to the future growth rate of domestic coal production.