By Ulf Bergman
Last week's deadly coal-mine accident in the Chinese province of Shanxi threatens to add further disruption to the global trade in the most carbon-intensive of fossil fuels. The global flow of coal was already affected by concerns over energy security amid the near-closure of the Strait of Hormuz and its impact on crude oil exports from the region. At the same time, rising energy demand, driven in part by the rapid expansion of data centres and artificial intelligence infrastructure, means that buyers have less tolerance for supply shortfalls than in previous years. Any disruption to coal flows is therefore more consequential than it might otherwise appear.
The news of the accident has provided some support for coal prices during this week’s trading, with front-month futures for delivery in Newcastle and Rotterdam a few per cent higher than at the end of last week. The contracts for delivery at the Dutch port have seen the most significant gains in the past few days, contributing to nearly 30 per cent gains since the second half of April. For the futures for delivery at the former port, the increase has been approximately half that of the European contracts.
China Dominates the Coal Market
The world’s second-largest economy occupies several top spots in the coal trade. The country is simultaneously the world's largest producer, importer and consumer. The commanding position on the supply side has provided a cushion for the country amid disruptions to crude oil flows from the Arabian Gulf. However, this depends on continued, uninterrupted output.
The tragic accident last Friday resulted in nearly a hundred deaths, marking the deadliest incident in over ten years. Beijing has worked extensively over the past twenty years to reduce fatalities in its mining industry, with generally observable success. Such a large-scale accident will almost certainly lead to new safety inspections and a mix of temporary and permanent mine closures. Although the site in question produced metallurgical coal, such inspection efforts rarely target a single coal mine type. As a result, thermal coal mining activities are also likely to come under renewed safety scrutiny.
Last year, over 90 per cent of China's coal needs were met by domestically produced coal, with seaborne imports accounting for more than two-thirds of the remainder. Imports from Mongolia are gaining significance, reducing shipping's market share. Therefore, any disruption to domestic production could have wide-ranging effects beyond the coal sector. According to last year's data, a one per cent drop in domestic output, replaced by imports, would lead to roughly a thirteen per cent increase in demand for foreign-sourced coal. Given that seaborne imports account for only around seven per cent of total consumption, even modest domestic shortfalls translate into outsized percentage increases in import demand, meaning that even a small decrease in domestic supply could substantially boost demand in the dry bulk shipping market. However, land-based imports from Mongolia and, to a lesser extent, Russia could partially offset any domestic shortfall before seaborne shipments are required.
Supply Disruptions on the Horizon for Asian Buyers
Recent announcements have stated that Indonesia is changing how exports of several commodities, including coal, will be handled in the future. As part of this, exports will be handled centrally by a state entity, and individual miners will no longer deal directly with overseas buyers, effectively giving the government power to regulate the trade. Additionally, a cap on coal production has been set for the year, and currency restrictions require all exporters to deposit proceeds in designated domestic bank accounts for a minimum of 12 months. The implementation of the changes to exports will be phased, with a transition period due to begin on the first of June. The more disruptive phase with full state control will then begin in September.
Given Indonesia’s central role in the global coal trade, even a minor decline in shipped volumes will directly affect global coal supply chains. According to Signal Ocean data, over the past three years, 37 per cent of all seaborne coal has originated in Indonesia. During the same period, some 42 per cent of Indonesian exports have been destined for China, while India received nearly a fifth of the flow. Beyond the two major markets, most of the remainder has been delivered to other Asian countries.
The disruptions to the global flow of crude oil amid the near closure of the Strait of Hormuz following the US and Israeli strikes on Iran, and the very uncertain developments over any peace deal, suggest that global buyers will maintain a strong appetite for coal. The likely pressure on Indonesian supplies of the commodity will, in turn, force Asian buyers to compete with buyers from the rest of the world for sources further afield.
Implications for Dry Bulk Shipping
If one assumes that, despite a potential decline in Indonesian exports, seaborne coal volumes remain broadly in line with recent years, tonne-mile demand in the trade is set to increase as Asian buyers seek supplies from more distant sources. While shipments from Russia’s Pacific terminals could offer supplies closer to home, major buyers such as Japan and South Korea may not consider this an option. Additionally, exports from those terminals face infrastructure constraints.
However, additional supplies from alternative sources may be hard to obtain given capacity constraints across most major exporters. Still, Asian buyers are likely to source more from more distant producers, such as Australia and South Africa, where some output growth is possible. Hence, as is often the case, friction in global trade benefits shipping through higher tonne-mile demand.
A meaningful disruption to the Indonesian coal trade would also alter the dynamics across the dry bulk vessel segments. Given the nature of the country’s infrastructure, Indonesian exports are dominated by supramaxes and panamaxes, with capesizes playing only a minor supporting role. However, should Asian buyers opt to source more of their coal at the end of long-haul voyages, it would support capesize demand, while panamaxes and, in particular, supramaxes would face headwinds, as terminal facilities allow for larger vessels and economies of scale.
Data source: Ocean Analytics