Pacific dry bulk Panamax freight rates from Indonesia edged up through the week to a three-week high because of stronger coal-fired power demand in China.
The rate to move a 75,000t shipment from Indonesia to south China rose to a three-week high of $7.30/t on 19 June from $6/t on 26 May. An uptick in temperatures in south China has supported coal-fired power demand, with Jiangsu province's power usage at 900GW since the start of June, up by 17pc from a year earlier. Freight rates were also buoyed, as interest for seaborne coal was piqued following higher domestic coal prices. Increased activity in the low-calorific value (CV) Indonesian thermal coal market also supported rates, as traders attempted to short-cover their requirements from previously-awarded Chinese coal tenders.
Coal demand was also supported by the forecast of a possible El Nino weather trend in the second half of this year, which could result in lower rainfall and higher temperatures in some parts of China, potentially limiting hydropower output and raising reliance on coal-fired generation. China's thermal power generation rose on the year in May following an increase in electricity demand and weaker hydropower output. China's thermal power generation, which mainly comprises coal-fired generation, rose above seasonal averages to 630GW in May. The gains came as hydropower generation posted its sharpest year-on-year decline since at least May 2007, falling by 54GW on the year to 110GW in May.
Pacific Panamax rates this week were up from a 13-week low recorded on 26 May, caused by weak demand sentiment in key Asian markets. High Chinese coal inventories at key ports pressured freight rates to the 13-week low. Rates were further weighed down in May by lower coal demand from China's power and non-power sectors. The Pacific also saw an oversupply of vessels during this period. "The market's pretty depressed, activity levels are sluggish, and the cargo to tonnage ratio remains dismal," a shipbroker told Argus on 26 May.
Freight rates from Indonesia were pressured towards the end of May by Chinese demand pivoting towards higher-calorific value (CV) seaborne coal, following aggressive offers of seaborne coal from Russia and Colombia, curtailing demand for low-CV material mainly sourced from Indonesia.
Chinese recovery fuels higher demand outlook
Demand started to pick up towards the end of May, but a rise in Panamax rates was offset by falling Capesize rates, putting additional downside pressure on the Panamax segment.
Combined coal burn at utilities in China's eight coastal provinces averaged 2.12mn t/d in the week to 15 June, up from 1.73mn t/d in the week to 17 May. This led to a decline in coal stocks at utilities and ports, which injected positive sentiment into the seaborne coal market.
China's central bank announced a modest rate cut on 15 June to boost banking liquidity and the overall economy. Expectations of further lending rate cuts have led to some optimism about China's economic recovery, which could support freight rates in the medium-term, if coal demand is bolstered as a result.
But freight rates could be further pressured going forward, as coal consumption could trend downward with hydropower supplies likely to increase during the monsoon season in China. China's major hydropower-producing provinces, Yunnan and Guizhou, are likely to experience heavy rainfall this week. An oversupply of vessels also remains a concern, as demand for Australian cargoes was slow this week compared to last week. This could contribute to an oversupply of vessels in the north Pacific as shipowners will likely no longer consider repositioning vessels to the region.
