Signs of recovery: Must-know outlook for the Baltic Dry Index (Part 4 of 6)
Coal and grain
It’s not just about iron ore, according to Navios Maritime Partners LP (NMM). Coal and grain will also be important drivers of demand for dry bulk ships. Countries such as China and India have been increasing their imports of coal at a compounded annual rate of over 20% each year over the last few years.
While China used to be a net exporter of coal in 2009, it’s become the world’s largest importer today. As steel production continues to rise and a number of planned new coal-fired plants come online, China and India’s coal imports are expected to grow over the next several years.
According to a statement posted on CCTD (China Coal Transport and Distribution Association) released in December 2013, China’s energy-saving targets, Indonesia’s proposal to raise mining fees (if signed to law), and rising shipping rates could curb coal imports in 2014. The chart above shows that coal imports are so far forecasted to grow by a much smaller amount compared to 2013.
But this won’t be the end, even if CCTD’s projection comes true—after all, it projected that coal imports would fall in 2011, but China continued to import more. A recent report from Wood Mackenzie titled “China: The Illusion of Peak Coal” points out that thermal coal demand is expected to double by 2030, driven by development in the central and western provinces. The research and consultancy firm also sees only modest investment in traditional natural gas reserves and slow development of unconventional shale gas reserves. Given how expensive LNG (liquefied natural gas) is, coal is competitive.
India’s seaborne coal imports growth is expected to slow in 2014, based on the chart shown above. Yet India’s seaborne coal remains an attractive area of growth, as the country needs to make up for the shortfall in domestic production. Over the past six years, production has fallen short of target due to difficulties in obtaining regulatory approvals, lack of railway access, and other issues, according to an article by Reuters. As it doesn’t seem like such reforms will be able to be implemented right away, Coal India estimates a shortage of 350 million tonnes of coal by 2016–2017, which implies a 20%-to-~32.5% compounded annual growth from 2014′s figure. (No analyst questioned the forecast for 2014).
Browse this series on Market Realist:
- Part 1 - The Baltic Dry Index fell in January but annual growth is positive
- Part 2 - Why new iron ore capacity should drive the Baltic Dry Index
- Part 3 - Why seaborne iron ore could replace China’s iron ore
- Commodity Markets