China’s metallurgical coal imports make up ~15% to 25% of global metallurgical coal import volume. Rising imports are often a positive for the shipping industry, as it means more distribution revenue for shipping companies. Unfortunately, that is not what we have seen for the past three years.
China’s Metallurgical Coal Import Does Not Trend with Shipping
Over the past few years, China has become a larger player in the global metallurgical coal trade. It is now the second largest importer behind Japan. While China’s share of global coal import grew, the Guggenheim Shipping ETF (SEA), an ETF that mimics the performance of the Dow Jones Global Shipping Index, moved in the opposite direction. This suggests that something else was driving China’s coal import volume and the Guggenheim Shipping ETF.
Global Metallurgical Coal Premium Might Have Driven Import
What might have partially driven China’s import volume is the premium of global metallurgical coal to China’s domestic prices, shown in the data above. When global export prices for metallurgical coal fell below China’s domestic price, import volume increased. Before 2008, China was a net exporter of metallurgical coal. China might have acted more or less as a value hedge fund importing raw materials when prices dropped.
Lower Global Metallurgical Coal Prices is Negative for Shipping, but…
Additionally, lower global prices (premium) for metallurgical coal often suggest lower economic activity from countries such as Japan, Korea, India and Europe. Since China’s economic activity is closely tied to the global economy, China was negatively affected as well. Lower economic activity translates to lower demand for other dry bulk materials such as iron ore and thermal coal, which disfavors shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX) and Eagle Bulk Shipping, Inc. (EGLE). On the bright side, when global economic activity picks up and China imports more metallurgical coal for reasons other than import prices, those companies will benefit. It shall also help the Guggenheim Shipping ETF (SEA).