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Why Cyclone Ita might support the coal trade as inventories fall

Xun Yao Chen

Why we're seeing mixed signals for dry bulk shippers like Navios (Part 11 of 11)

(Continued from Part 10)

Good-bye, cyclone

As time passes, Tropical Cyclone Ita will become a topic of the past and coal shipments should resume. That might provide some support for shipping rates and the Baltic Dry Index in the short term, which in turn will support the Guggenheim Shipping ETF (SEA) and dry bulk shipping companies such as Diana Shipping Inc. (DSX), DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), and Star Bulk Carriers Corp. (SBLK).

Coal inventory

While drier weather will allow coal companies along the eastern coast of Australia to resume operations, China’s coal port inventory is another key factor to look at. Because China’s thermal coal inventory is seasonal—inventories pile up before the hot summer and cold winter—it’s important to look at year-over-year changes.

Since peaking at 33.40% in mid-February, year-over-year growth has fallen to just 2.15% at the end of March 2014. Theoretically, to support growing consumption, inventory levels should rise as safety stock increases. Inventory levels should also risen if China is buying more foreign supply for domestic use relative to domestic supply.

Higher imports ahead?

As inventory levels have come down, we could see higher coal imports over the medium term as China prepares for the summer. While the difference between domestic and imported thermal coal prices is lower than it was in 2013 (see the previous chart), imported coal remains cheaper, which will be positive for the coal trade, dry bulk shipping rates, the BDI, Guggenheim Shipping ETF (SEA), and dry bulk shippers.

To learn more about investing in dry bulk shipping stocks and ETFs, check out Market Realist’s Marine Shipping page.

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