As China’s key coal imports fall to just ~0%, is there an upside?

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Thermal coal imports

If imported seaborne coals were all cheaper to produce than domestic coal in China, then lower thermal power output growth wouldn’t negatively affect the coal trade. However, this isn’t the case, since China has an abundance of thermal coal used to produce electricity.

China Monthly Coal Imports

As thermal power output growth has fallen, so has the growth for China’s coal imports from Indonesia and Australia—the two key countries that supply seaborne coal. While year-over-year growth used to hover around 20%+ (marked by the red line and the right axis), it has since dropped to ~0%. In April, growth stood at just 1.1%. Note the chart above includes some metallurgical coal imports, which are used to produce steel and influenced by China’s steel production.

Investors should consider that the seaborne coal trade tends to rise towards the winter and summer, when electricity consumption is high—this is one reason why year-over-year growth is shown to account for seasonality.

Key takeaway

If China’s thermal power output growth improves over the next few months as manufacturing picks up in China, then coal imports and dry bulk shipping companies such as Star Bulk Carriers Corp. (SBLK), Safe Bulkers Inc. (SB), Navios Maritime Holdings Inc. (NM), and DryShips Inc. (DRYS), as well as the Guggenheim Shipping ETF (SEA), should benefit.

In an earlier series, we also noted that dry bulk shipping companies could benefit from China’s efforts to control pollution emissions as the government seeks to import higher-quality seaborne coal from countries such as Australia. But while imports from Australia have grown faster than imports from Indonesia in 2013, slower thermal power output growth could continue to pressure shipping companies down the road.

Investors should also keep an eye on India, as the country could be on the fringe of multi-year investments in infrastructure and the country is expected to face coal shortages over the next few years.

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