China is the world’s second largest importer of coking coal, sometimes called metallurgical coal, behind Japan. Rising coking import volume can point to the country’s rising demand for steel rolls, and thus industrial production as well. More import means more revenues, earnings, and equity prices for shipping companies like Diana Shipping, Inc. (DSX) and Eagle Bulk Shipping, Inc. (EGLE).
During the last month of 2012, China imported a record volume of coking coal at 7.58 million tonnes. This is a significant increase from November’s amount of 5.81 million and just 3.6 million in October. The drastic change in coking coal import suggests demand for steel products is on a rise after the government announced ~$160 billion of economic stimulus targeted mostly at infrastructure investments such as railway and roads during September 2012.
Although such significant increases were usually followed by lower import volumes the following month over the past two years, the average increase in coking coal import, marked by the orange trend line, may steepen as stimulus funding enters the economy. This is directly positive for dry bulk shipping companies such as DSX and EGLE (mentioned earlier), since these companies engage in the transportation of dry raw materials such as coking coal on sea.
As a percentage of total dry bulk trade, coking coal contributes to just ~10%. However, coking coal use is highly correlated with iron ore use, as the two are both necessary to make steel. Since China has to rely heavily on outside sources of iron ore, iron ore alone makes up ~25 to ~30% of total dry bulk trade. In addition to the Guggenheim Shipping ETF (SEA), which invests in leading shipping firms that transport dry bulk products, ETFs such as Market Vectors-Coal ETF (KOL) and Market Vectors Steel ETF (SLX) should also benefit.