By Mark Nugent
Mixed bag
Having now completed our dry bulk commodity outlook, we take a look at the prospects of seaborne thermal coal trade given its renewed importance in global energy markets.
The outbreak of war in Eastern Europe and overall tightness in the natural gas market has led to an unexpected revival in steam coal trade. Across the first 5 months of the year, 386.5m tonnes of steam coal has been shipped on bulk carriers, 6% lower versus the same period last year. While this shortfall in energy supply has driven strong intent towards renewable energy, given the lengthy development and installation process of wind power, for example, we anticipate coal with play a more vital role in the global energy mix in the coming years than we previously had assumed. However, we still see thermal coal demand declining in 2022 due to a sharp fall in Chinese imports. Though not enough to offset declines in Chinese imports, we have increased our forecast for European imports.
Overall, we see sharper declines in demand in the Panamax sector as opposed to the Capesizes from coal trade out to 2025. This is largely due to the reduction in Chinese imports which is mostly lifted on the Panamaxes. Demand from steam coal voyages on Capesizes is expected to taper off at a slower pace given these vessels are seeing increased interest for Atlantic stems into Europe, where we expect the majority of replacement Russian volumes to come from.
Chinese imports lowered
The primary reason we continue to see a decline in seaborne steam coal trade is a structural decline in Chinese imports. China is the largest source of thermal coal demand globally, but is intending on reducing its reliance on the seaborne market for supply. In 2021, the country imported 279.9m tonnes on bulk carriers, the highest level on record. This was a result of mass stockpiling in the country with the aim of securing sufficient energy supplies and ensuring no future shortfalls would occur. However, as commodity prices have continued to soar, the country has increasingly sought to improve domestic production across many dry bulk commodities, including thermal coal. Though safety procedures and several incidents delayed a significant ramp in 2H21, 2022 has seen capacity considerably increase. Daily coal production reached its highest level in March at 12.8m tonnes amounting to 396m for the month. As a result, China imported just 42m tonnes of thermal coal in Q1 2022, declining by 38.2% YoY. While shipments have improved in Q2, we still expect this overall decline to continue.
Demand for coal, particularly seaborne product, has tapered as lockdowns have reduced energy usage and thus inventories at power plants are now at healthy levels. Looking beyond 2022, we see incremental declines in Chinese steam coal imports as it continues to strive to meet its coal needs from domestic mining. Remaining relatively firm in 2023, we see a sharper decline in 2024 as gas markets stabilise and its price compared to coal becomes more competitive. China is also the largest renewable energy producer in the world, although a minor portion of the country’s power generation, this will continue to grow going forward and replace energy produced from coal.
Revived demand in Europe
With European energy supplies approaching critical levels, the bloc has reverted back to coal, which has proven most reliable amongst is peers. European countries have so far imported 36.6m tonnes of coal on bulk carriers across the first 5 months of the year, 89.5% higher YoY. For 2022 as a whole, we forecast 72.7m tonnes of steam coal discharging in EU countries, rising by 35.9% YoY. Based on this, bulk carrier demand from EU steam coal imports is set to rise by 66.2% YoY. This is because average voyage lengths of European coal imports are set to increase considerably now buyers are shifting away from purchasing Russian supply. As of today, shipments are still arriving from Russia, but from mid-August, these will no longer be permitted under EU sanctions. Therefore, we expect replacement coal volumes to come primarily from sources in the Atlantic namely the US and Colombia. As we have discussed previously on this topic, while we expect increased demand for South African coal in Europe, the issues on the rail network mean logistically a sharp increase in exports from the country is unlikely.
Outlook
Overall, we still expect steam coal to play a prominent role in the dry bulk market and continued strength in natural gas prices could secure coal’s role in the global energy mix for a prolonged period of time. Coal-to-gas forward switching prices in Europe, Japan and South Korea now all suggest it will be more economical for power plants to burn coal until 2025 at the earliest, implying there will continue to be firm coal demand from these countries going forward. However, some risks to our current outlook remain. China may opt to continue to develop its domestic mining capacity due to high prices on the seaborne market. Further, to reduce reliance on Russian energy supplies the EU and others have committed to ramping up renewable energy spending, the speed of which will determine coal’s role in energy generation going forward. The green energy transition remains the primary risk to seaborne thermal coal trade, although this has been paused in the short-term due to the war in Ukraine, we still see this shift continuing long-term.