Published on November 22nd, 2014 |
by Ross Garner
Global Trading Patterns set for structural changes in wake of environmental ‘War on Pollution’
The dry bulk freight markets are volatile. Shipments of grains, beans and wheat fluctuate according to weather conditions, and whether or not Russia has invaded Ukraine. Iron Ore and thermal coal freights depend largely on China’s Industrial Production as a measure of GDP.
Thermal coal freight markets are set for their biggest upset thanks largely due to China’s new regulations on the sulphur and ash content of coal imports.
The new Chinese regulations will come into effect from January 1st 2015, and stipulate that coal that contains more than 16% ash and 1% sulphur will no longer allowed to be burned.
This will have a serious and detrimental affect on the dry bulk freight market, primarily in relation to Australian coal exports. Around 55% of Australian coal fails to comply with the new standards set by Chinese regulators and comes a bitter blow for an already fragile market.
Coal shipments from the seven major exporting countries during the January-May period already accounted for 40% of the total shipments for 2014. Indeed a Reuters report said the global market for seaborne coal will be oversupplied by roughly 10 million tonnes in 2014.
The new regulations look set to weaken to the Qingdao-Western Australian coal trading route and thereby diminish Australian coal exports to China.
Australia’s loss is not Indonesia’s gain
Indonesia has high quality coal resources that fall within the new Chinese regulations. However, Indonesia is now being very national in its energy independence as it seeks to prevent the exploitation of its natural resources.
Measures to prevent the exploitation of its coal resources include an annual capping on coal production, and requiring companies to register with the government for licenses for coal exports.
This all makes it severely unlikely that Indonesia will be able to plug the gap left by diminishing Australian coal exports to China.
Dry bulk freight markets tend to be particularly unpredictable due to Chinese polarisation. The cost of bringing down the environmental cost of development in China has lead to the introduction of these new regulations. However, if Australian coal fails to make the grade, and Indonesia exports alone cannot make up for the demand then importers will have to look further afield in order to keep domestic steel production up.
Chinese industrial growth hit 8.8% in mid-August so it seems that steel production will steel continue to play a large part in Chinese growth, and therefore appetite for thermal coal will be maintained.
Colombian coal could be one source of imports. Colombian coal production is expected to reach about 94 million tonnes and would satisfy Chinese regulations.
Shipping quantities of coal from Colombia to China would also provide an increase in ton-mile earnings for shipowners in so far as they would be transporting the same amount of coal as normal (say from Australia to China) but over a longer distance. An increase in this market would naturally favour freight rates for the Capesize markets.
Currently most Colombian coal is exported to Europe, but it is possible that EU emission regulations would push down seaborne coal imports and open up the possibility for these cargoes to fill the void left of a lack of Australian coal exports into China.
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