Inventory 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 falls to a specific amount, imports will often rise as companies seek to replenish stock. Higher imports will cause higher shipping rates, in capesize and panamax sized ships in particular, which means higher revenues, earnings and free cash flows for dry bulk shipping firms.
Port inventory at a year low, expect to bottom
According to Shanghai Steelhome Information, total inventory for thermal coal at Chinese ports stood at 19.32 million tons on Friday, May 3rd, a change of -1.43 million tons from April 26th. Total inventory has fallen due to seasonality; demand for thermal coal often peaks during March and July/August as people no longer need to turn heaters or coolers on. But inventory is expected to bottom as firms make preparations for this upcoming summer. Last year, inventory bottomed at around 19 million tons at the end of April.
Stronger imports expected and shipping will benefit
Thermal coal imports have also led inventory figures by about two months with a correlation of 0.74 over the past two years because importers factor in transportation time and documents need to be processed.1 As inventory is expected to rise over the next few months in preparation of the hot summer, thermal coal imports should rise as well, which is positive for shipping rates.
Because China’s thermal coal import makes up at least 5% of total dry bulk shipping revenue, an increase in thermal coal imports in the coming month(s) is a short-term positive for dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Navios Maritime Partners LP (NMM). 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.
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