Weight of Freight: Capesize rates unlikely to receive support from Australian coal

Author Andrey Telegin, Senior Reporter

It has been more than two months since the HL Taean left the Australian port of Newcastle for Fangcheng in China. This was the first Capesize vessel loaded with coal to leave Australia for China since the informal Chinese ban on Australian coal. Does this development support Capesize freight rates? Probably not.

Before the ban, an average of 27 Capesize vessels a month made the east Australia-to-China coal trip. For comparison, 315 Capesizes and Newcastle maxes loaded with iron ore sailed from Western Australia to China last month.

Although the re-emergence of these shipments might not seem significant, it could make a difference in certain market conditions — for instance, when many shipowners moved their fleets from the Pacific to the Atlantic basin between December and February in search of cargoes and positive TCE numbers.

In February, charterers on the coal route from Australia to China were cautious about using large vessels and preferred smaller sizes, particularly Panamaxes. But in March, the number of Capesize and Newcastlemax vessels on this route rose to 17, up from 5 in February, almost equalling the number of smaller vessels (see graph).

 

 

Most of the vessels carrying coal from Australia to China in March were probably contracted during the first half of the month, when we saw a rebound in freight rates — rate from Western Australia to China had risen to $9.10/t by 14 March from $7.40/t on 1 March.

But rates fell sharply in the second half of the month. This was not because charterers had stopped looking for vessels to carry Australian coal to China, but was rather the result of reduced demand from the Atlantic basin after landslides affected operations on Brazilian railways, limiting Brazil’s iron ore exports.

We should not overestimate the impact of revived Australian coal exports on the Capesize market.

 

Graph 2.2

So, what might we expect to see this year in terms of Australian coal exports to China and Capesize utilisation?

China importing less coal

China remains the world’s biggest coal importer, but the amount it needs is falling. Last year, the country imported 293.2mn t of all types of coal, down by 9.2pc, according to customs data.

China’s coal production reached 4.48bn t in 2022, up by 11.4pc from 4.03bn t in 2021, according to National Bureau of Statistics data. This was the main reason for the decline in imports.

Coal consumption in China increased by 18mn t to 4.25bn t last year, and is expected to rise steadily to 4.34bn t in 2025, according to International Energy Agency estimates.

In the first quarter of 2023, Chinese coal demand rose faster than expected, driven by rebounding electricity consumption as the economy recovers.

And China’s coal imports rose by 18.8mn t on the year to 44.5mn t in January-February 2023.

Imports were mainly up so sharply because they were starting from a low base — the result of Indonesia’s ban on coal exports from January 2022. The trend of rising imports could be supported by tighter safety measures at Chinese mines after a deadly accident at an opencast facility in the Inner Mongolia region in late February 2023. On the other hand, imports face some headwinds — not least China’s efforts to reduce carbon emissions and shift to cleaner energy.

According to a forecast from the Australian Office of the Chief Economist, China’s coal imports could fall by 16pc to 246mn t this year — 205mn t of thermal coal and 41mn t of metallurgical coal. In support of the Australian forecast, production in China rose by 7pc on the year to 734mn t in January-February.

Australia’s share in a shrinking market

Australian producers are re-entering a market that is becoming increasingly narrow and competitive, with many producers relying on Panamaxes instead of Capesizes, and some able to do without sea freight altogether.

Chinese buyers learnt to get by without Australian coal during the two-year ban, while supply constraints on Australian production limit exporters to merely tweaking current trade flows, according to shipbroker BRS. “There is no room for Australian coal in China unless Chinese GDP grows by more than 5pc this year,” one of market participants says.

How much coal can Australia realistically expect to export?

Graph 3.1

China’s imports from Indonesia are not expected to fall by less than 143mn t this year (the 2022 export figure, according to Banchero Costa) because of the low base that resulted from Indonesia’s ban on exports in January last year, imposed to ensure domestic supply. And Indonesia plans to increase exports by 13.6pc this year.

Meanwhile, Russia is looking to maximise exports and considers China a crucial market now most of its previous buyers have stopped buying its coal in response to the Ukraine conflict. The return of Australian coal to China could pose a challenge for Russian exporters. They might respond by offering discounts, but protecting their position in China will not be easy as rail bottlenecks limit their ability to export coal from Russia’s far-east ports. Shipping to China from Russia’s southern and northwestern ports is less profitable because of higher transportation costs. Nonetheless, Russia will make every effort to maintain at least its 2022 export level of 64mn t, according to Global Trade Tracker.

Nearly 7.9mn t, or 12pc, of Russian coal exports to China arrive by rail, including through the new Nizhneleninskoye-Tongjiang crossing that opened in November. In January-February 2023, Russia exported some 260,000t of high-calorific thermal and coking coal through this crossing — roughly equivalent of one Capesize and one Post Panamax cargo — and these flows are expected to rise.

The fastest-growing exporter of coal to China does not rely on shipping at all, using road and rail instead. Mongolia exported 28.8mn t of coal to China in 2022, almost twice the amount the previous year, according to the Mongolian customs service. These deliveries are expected to rise, with Mongolia completing two new rail routes from its coal deposits to China last year.

Assuming China’s three major suppliers maintain their 2022 volumes this year, Australian producers would only be able to export around 10mn t to China in 2023. But some market participants are more upbeat. US-Australian producer Coronado Coal, for instance, sees China taking up to 20mn t of Australian coking coal in 2023.

Last month, it took 4.2 Capesize vessels to carry every 1mn t of Australian coal exported to China. This is up from 3.4 vessels for each 1mn t between January 2019 and September 2020. If the utilisation rate remains at 4.2, then exporting 20mn t to China would require 6.1 Capesize vessels a month from April to December, or a total of 55 vessels.

If Australian producers can displace some Russian and Indonesian volumes from China and keep their exports at March levels — around 4mn t/month — then up to 17 Capesizes a month might be needed, or 150-155 vessels in April-December.

This could have some impact on freight rates, although it would probably be overshadowed by movements of iron ore.

But it could affect the balance between the Pacific and Atlantic basins. “While Australian coal has been going to India and Europe, it has put a lot of vessels into the Indian and Atlantic oceans. So we think this has been adding to [vessel availability] on the Tubarao to Qingdao route and keeping rates low,” a broker said.

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