CHINESE COAL DEMAND IMPACT
‘COAL CRISIS’: PORT PRESSURES An energy crunch in China is prompting a surge in thermal coal imports and in turn triggering widespread pressures. Andrew Penfold analyses this complex situation
8 Increased domestic production of coal in China will not meet demand and imports are on the rise triggering widespread pressures
Following hot on the heels of the crisis in the container supply chain, dry bulk demand and freight rates have accelerated sharply in the past few weeks. As discussed on many occasions previously in Port Strategy the conflict between politics and bulk trade is nothing new. This time, however, deeper issues are emerging with the focus on steam coal. The surge in energy demand has led directly to a crisis in the steam coal trades. How this plays out promises to have massive implications for ports. WHAT HAS HAPPENDED? The Chinese economy is suffering. Over-indebted construction (especially for speculative housing projects) has placed great strain on several of the major development companies that have been driving GDP development in recent years. Centrally planned efforts to defuse the property bubble have resulted in a slowdown of economic growth in the third quarter and the outlook is for a further weakening as property curbs are maintained. The depth of the problem is clear as the real estate and related sectors account for around 25 per cent of GDP. At the same time, a crackdown on local government debt is also underway. On its own, this adjustment would simply reduce raw material demand but there has also been an energy crunch for the economy as a whole and this has forced a partial curtailment of industrial production. There is a nationwide shortage of coal, and this has led to falls in electricity output with at least 20 provinces curbing output. This alone could see fourth quarter GDP slow to around three per cent according to Bank of America analysis.
24 | DECEMBER 2021
The strategic response has been to attempt to increase domestic production, but quality is low and much of this is in the wrong place – the overall result is a surge in demand for imports. There is now a scramble for coal on the world market and this has driven up both steam coal prices and dry bulk freight rates. This is not just a China problem. The global gas supply crunch – generated by both geopolitical and green issues – has triggered an extreme increase in both gas and electricity prices. In Europe, electricity prices have risen from around €10 per megawatt hour in autumn 2020 to a current level of at least €50. This has shifted the balance in favour of coal, with a much higher coal burn driving import demand for the electricity sector (as well as increasing reliance on environmentally damaging lignite and setting-back plans to reduce CO2 emissions). It is clear that coal must remain a significant factor in the European energy mix for the foreseeable future. In the USA, it is estimated that power plants will burn at least 23 per cent more coal this year than in 2020. THE CURRENT POSITION Essentially three aspects are dominant: 5 Freight rates are at (almost) unprecedented levels. 5 Dry bulk port congestion is a major issue. 5 Coal prices are very high, but the outlook is volatile. The resulting stress on supply chains has seen spot rates for Capesize dry bulkers increase from around US$18,000 per day to peak at around US$70,000 per day in early October. This is as high as during the peak markets noted in 2008 when the initial China-effect on freight rates was first noted. The
For the latest news and analysis go to www.portstrategy.com/news101
