Dry Bulk: Coal Trade Shifting on Sulphur Restrictions

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Dry Bulk: Coal Trade Shifting on Sulphur Restrictions
The dry bulk market is still trying to find a new balance, amid China’s economical reposition and shifting trade patterns. For instance, coal trade routes are changing on the back of stricter rules and the need for low sulphur coal. However, the verdict is still unclear regarding its long-term impact on dry bulk freight rates.

In its latest weekly report, Allied Shipbroking said that “this week came with some disappointing news for coal, as prices started to take on a downward correction. The retreat in demand seems to have been triggered by a sudden drop in temperatures in China brought about by a series of heavy rainfalls, whilst at the same time the overall market supply seems to have been boosted by a revamp in production volumes by local Chinese mines and a jump in port inventories. The feel now is that prices could witness a further 5 percent drop on top of the 5 percent drop noted thus far, whilst given the improved efficiency being slowly seen by Chinese mines, this expectation may well prove to be overly optimistic. Being that it is the second most important commodity in the dry bulk space in terms of volumes, it goes without saying that even small shifts can have significant impacts freight rates”.

According to Mr. Thomas Chasapis Research Analyst, “there have been a lot of discussion for years now regarding thermal coal and its future prospects in the global energy mix. China, the world’s largest importer (accounting close to 20% of the total seaborne trade) and major consumer, has already taken a series of steps to reduce its reliance on coal, most of which were in part responsible for the sharp corrections noted in dry bulk freight rates two years back. At the same time, given the increased competition being seen from the side of renewables, the longterm outlook has long been standing on a bearish ground”.

Chasapis adds that “despite all the above, things had started to look up since the end of 2016, giving a sense that this poor outlook on coal may have been over exaggerated. The price rally that ensued would culminate just this past month at 112.05 USD per MT, a level which is a 5-year high for the price of Newcastle coal. Although most of this rally recent rally was mainly driven by the overall shift towards higher quality coal, abnormal temperature conditions noted in China throughout 2018 (something that translated into increased demand for electricity generation and in-turn coal) were to be added to the mix, boosting China’s imports for the first half of 2018 by around 14% year-onyear”.

“At the same time, given the overall war still being placed on Sulphur we have seen considerable shifts in the sourcing of coal for most of the main importing countries. Just to place this as figures it is notable to point out that we have already seen a 34% rise in exports from Indonesia to China, driven in part by the need to source coal with lower Sulphur content. S. Korea (the 4th largest importer of coal after China, Japan and India) was also moving in the same direction, having set new regulations forcing generators to use coal with a maximum average Sulphur content of 0.4 percent, and shifting the overall trade patterns that were being noted up till now. Given that this trend may well follow through to other main importers, we could well be in the midst of a serious shift in the coal trade”. Allied’s analyst said.

“Not much is clear right now as to the long-term prospects of the coal market while the overall sentiment still seems to remain bearish. There are still some hopes that a partial upside might be witnessed in August, however with the seasonal low points of September and October following closely it is hard to see to what extent and in what form an upside could take shape right now. When looking at the longer-term view and while seeing large consumer bases like that of China being in a state of slow transition away from coal it’s hard to see long-term evidence and backing to support a bullish view on this vital commodity for the dry bulk sector”, Chasapis concluded.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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