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As thermal coal inventory in China falls, will demand pick up?

Xun Yao Chen

Have dry bulk shippers like Navios gotten ahead of themselves? (Part 4 of 4)

(Continued from Part 3)

Inventory levels

Thermal coal shipments make up ~20% of the global dry bulk trade, while China accounted for ~17% of the volume in 2012. Although high thermal coal inventory levels at Chinese ports tend to be negative for dry bulk shippers such as Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), and Baltic Trading Ltd. (BALT), as importers could scale back imports in the future, thermal coal inventory in China tends to go through a seasonal pattern.

Coal Inventory at Ports

Year-over-year growth

Since demand for cooling and heating is highest during the summer and winter, port inventories follow accordingly, as importers stock enough coal to make sure there’s adequate supply. But because this trend is well known, and because it also drives seasonality in the Baltic Dry Index, analysts use year-over-year growth.

While year-over-year growth did peak much higher than in previous years, inventory levels barely grew compared to similar months in 2012 from October to December. Recent high inventory figures likely reflect China’s weak electricity consumption. While weak economic activity might have been one factor, the government’s effort to curb pollution, a warmer winter (contrary to what we’ve experienced in North America), and increased hydropower production were probably more important drivers. According to Helen Lau, a Hong Kong–based analyst at UOB-Kay Hian Ltd., thermal coal stockpiles also rose because of cheaper imported coal (we’ll share a chart next week).

Thermal coal 

On March 21, 2014, the total amount of thermal coal at Chinese ports grew 8.35%, down from 12.32%. Although high inventory figures likely negatively affected coal imports and the Baltic Dry Index (the benchmark price for hauling dry bulk goods on marine vessels), a recent decline in thermal coal could be considered a past negative on course to be neutral or positive for dry bulk shipping companies and the Guggenheim Shipping ETF (SEA). Plus, Lau predicts a pickup in consumption during the second quarter. Keep in mind that recent declines yearly inventory growth are in part driven by sustained increases in inventory until the end of March last year.

To learn more about investing in the marine shipping industry, see the Market Realist series Betting on a Chinese stock rebound? Crude tankers might be better.

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