Thermal coal inventory remains high, short term risk for dry bulk shipping

Thermal Coal Port Inventory 2013-03-29Enlarge GraphInventory levels for thermal coal at Chinese ports reflect the safety net that companies decide to hold, as well as the difference in expected and actual demand. When inventory rises above a specific amount, it is often negative for imports and shipping as firms seek to reduce inventory.

Port inventory remains high at end of March

Aggregate inventory for thermal coal at Chinese ports stood flat at 25.72 million tons on Friday, March 29th. 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 2013-03-29Enlarge Graph

High inventory level could mean lower imports ahead

For the past two years, thermal coal imports have led inventory figures by about two months with a correlation of 0.74, higher than our previous research indicated (see “High thermal coal inventory may point to lower imports“).1 This is likely because importers plan ahead to increase inventory and ensure adequate supply. With March inventory levels sitting at a 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 imports in the coming month(s) 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 Knightsbridge Tankers Ltd. (VLCCF). This will 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.