6 minute read
Coal-crisis
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
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.
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
8 Increased
domestic production of coal in China will not meet demand and imports are on the rise triggering widespread pressures
likelihood is that rates will ease slightly but remain very high into the first quarter of 2022 and – probably – beyond.
The volatility of the market for these vessels is well illustrated by the loss of faith that was initially noted after the weaker Chinese economic outlook was reported in mid-2021. This saw forward freight rates weaken but the new ‘coal crisis’ has pushed this firmly into reverse. More coal to keep the power on in the winter will surely equal higher bulker rates.
More coal demand is also generating severe port congestion which, in turn, is cutting effective shipping capacity and impacting the supply side of the market equation (just as is the case with containers). As recently as end-September, the broker Braemar ACM was estimating that at least six per cent of the global dry bulk fleet capacity was waiting to discharge at major Chinese bulk import terminals. This is further pushing up freight rates. The congestion issue is impacting all ship sizes, with smaller vessels focusing on the grain trades also seeing congestion with Chinese grain silos at high usage levels – see Figure 1.
Coal prices have surged. The weakening of the Chinese economy has not been manifested in lower prices. Steam coal market indicators in Australia peaked at around US$180/ tonne in October. This represents an increase of around 120 per cent since the beginning of the year.
Why has this happened with a weakening Chinese economy?
The answer is that the Chinese energy sector has been squeezed by higher oil and gas prices and that it remains dependent upon imports. With similar pressures noted in Europe and the USA this has seen a surge in demand for coal imports – all of this despite political moves to reduce coal burn.
The focus of the situation is China. The Chinese government has ordered its top coal regions to boost output and will allow power utilities to charge customers higher prices in order to combat shortfalls. According to Reuters, Inner Mongolia and Shanxi have ordered miners to lift combined annual production capacity by more than 160m tonnes. Despite this, power rationing is underway. This will not be sufficient to provide the required burn, and this has driven import demand. The position has been made more complex by anti-corruption cases brought against the coal sector which has forced some mine closures.
Coal inventories at major Chinese ports were at 52m tonnes in early October which is around 30 per cent down on the year before. The government is now calling for further imports to offset this shortfall following a tonnage drop in the first half of 2021. Reality has forced the release of Australian coal which had been the subject of a de facto politicallydriven embargo since mid-2020 and the USA is also stepping up tonnages. Major power plants are holding average stockpiles of around 10 days supply, with this being half of the capability last year.
This all means increased demand with discharge facilities simply unable to keep up with these volumes.
WHAT PORT AND SHIPPING IMPLICATIONS?
It is important to note that the port congestion issues are focused on Chinese ports. The major coal load terminals –
8 Figure 1: Chinese Dry Bulk Port Congestion
8 Figure 2: Australian Coal Prices US$/tonne
although recording higher volumes – have not seen any real difficulties in the past few months. The position is complicated because – on the one hand – very strong demand would indicate the need for greater discharge capacity (especially for the largest vessels) but, on the other, coal remains an unfashionable commodity and its long-term prognosis is not favourable.
Demand and pricing will remain high as long as Chinese shortfalls drive the market. The need for large scale investment in new capacity – be it in production, ports, or shipping capacity – must remain uncertain, however. Great caution should be taken in forward investment in these sectors simply on the basis of current market specifics.
8 Leading Chinese
