High thermal coal inventory may point to lower imports

Thermal Coal Port Inventory 2013-03-21Enlarge Graph

Inventory levels for thermal coal at Chinese ports reflect the safety net that companies desire to hold, as well as the difference in expected and actual demand. When inventory rises above a specific amount, it is often negative for import and shipping as firms seek to reduce inventory.

Port inventory remains high in March

Aggregate inventory for thermal coal at Chinese ports rose to 25.39 million tons on Friday March 15th, 2013, an increase of 0.39 million tons from the prior week. This suggests that either firms are foreseeing increased demand in the near future, hence continuing to build up inventory, or demand did not meet expectations. In China, demand for thermal coal peaks during March and July/August due to seasonality. Port inventories have peaked around the same month, or the month before, over the past two years as firms temporarily scale back on purchases and large volumes of coal are consumed during peak months.

China Thermal Coal Data 2013-03-22Enlarge Graph

High inventory level could mean lower import ahead

Interestingly, thermal coal import has led inventory figures by about two months with a correlation of 0.72, shown in the chart above.1 This is likely because importers plan ahead to increase inventory and ensure adequate supply. With March inventory levels sitting at the higher range, inventory levels could fall in the coming months as firms cut back on imports.

Lower imports may point to short term negative, if imports of other goods do not increase

As China’s thermal coal import makes up at least 5% of total dry bulk shipping revenue, a reduction in thermal coal import in the coming month could be a short term negative for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Eagle Bulk Shipping Inc. (EGLE). EGLE will likely be affected the most because the company focuses on the spot market.2 This will also affect the Guggenheim Shipping ETF (SEA) as well, albeit to a lesser extent, because the ETF also holds investments in oil and container shipping that make up more than 50% of the shipping industry’s revenue.

  1. As an example, import volume shown on the March 2012 is the actual value for January 2012.
  2. The spot market differs from time or charter contracts that are more long term focused, and refers to a one time contractual agreement to ship a specified amount of raw material at a negotiated price. Companies that engage in the spot market are often more volatile than companies that engage in time or charter contracts.