According to the US (SPY) (DIA) Energy Information Administration, or the EIA, China and India accounted for 98% of the increase in world coal trade between 2008 and 2013. This underscores why investors should keep a close eye on any changes in the coal trade in these countries.
More downside to China’s coal imports
Things are not looking good on the coal demand side. Arch Coal, the second-largest US coal miner, has filed for bankruptcy. This came on the heels of a series of coal bankruptcies in 2015, which were mainly due to the weak coal demand and burgeoning supply. China’s coal demand, which is close to half of the global coal demand, fell by 30% YoY (year-over-year) in 2015. This is due to the combined effect of continued weakness in the steel and iron ore markets and pollution control measures enacted by the government.
Many market participants are forecasting a further fall in coal imports for China in 2016. According to Colin Hamilton, head of commodities research at Macquarie, Chinese 2016 coal imports could drop by around 25 million tons, and in the long term, they may even fall to zero.
India’s coal imports
Amid China’s falling coal imports, India was seen as a bright spot, ready to take the coal baton from China. While India’s coal imports have provided some relief to coal exporters, they might not be sustainable. Coal imports in India for the first nine months of the fiscal year ending March 2016 were 132 million tons, which is a decline of 15% YoY. This decline is due to an increase in local coal production.
According to the EIA, “Efforts are underway to substantially increase domestic coal production over the next few years and to complete three major rail transportation projects for facilitating increased shipments of coal from major producing regions in northeastern India to demand centers in other parts of the country.”
This should continue to put pressure on dry bulk shippers, especially those operating in the Capesize and Panamax segments. Companies operating in these segments include Ship Finance International (SFL), Navios Maritime Holdings (NM), Scorpio Bulkers (SALT), DryShips (DRYS), and Star Bulk Carriers (SBLK).
Navios Maritime Holdings and Ship Finance International make up 6.5% of the Guggenheim Shipping ETF’s (SEA) holdings. SEA seeks to replicate the performance of the Dow Jones Global Shipping Index. In the next part of this series, we’ll see if iron ore has any good news for the dry bulk industry in 2016.