China’s import volume for metallurgical coal accounts for about two to two and a half percent of global dry bulk shipping volume, measured in metric tonnes. While the figure may seem small, China’s coking coal import volume can change drastically from month to month. Since supply for dry bulk shipping is very inelastic in the short term (meaning firms cannot adjust supply to demand very flexibly), even a slight change in import volume can move day rates for transporting bulk materials significantly.
In January 2013, China continued to import large quantities of coking coal, a raw material input for the production of steel. Although lower than the record 7.58 million metric tonnes imported in December 2012, January’s volume of 7.15 million metric tonnes is still above the average over the past two years. There are two possible factors that explain the high import volume. First, higher manufacturing activity in China has increased demand for coking coal, since steel is commonly used in manufacturing. The second factor is the Chinese New Year; as it took place in February this year, firms have shifted imports from February to January.
Thus, in the upcoming update for February, import volume may weaken significantly, posing a short term risk for dry bulk related equities such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Eagle Bulk Shipping Inc. (EGLE). DRYS and EGLE are likely to be most sensitive to the risk, since a substantial portion of their revenues is derived from the spot market, contracts that are designed to carry specific amounts of bulk goods for one day business. This will also affect the Guggenheim Shipping ETF (SEA), but perhaps less so as the ETF invests in high dividend paying global shipping companies that tend to be large and operate on longer term contracts.