Expanding coal trade defies negative overtones

An upwards trend in global coal trade persists, despite justifiable worries among commodity and freight market observers about longer term prospects. Solid growth unfolded last year and there seems to be a possibility of further enlargement in 2019. Yet the threat from environmental pressures and the shift towards alternative, cleaner energy sources remains prominent.

Estimates for world seaborne coal trade in 2018 are still provisional. Available firm data plus best guesses about other elements suggests that there was a large increase from the preceding year, perhaps approaching 50mt (million tonnes). Several major and minor importers increased purchases. Higher volumes recorded in the past two years have reversed what had appeared to be a downwards trend evolving in the previous two years.

Despite this positive performance and indications of rising future import demand, during the next twelve months at least, great uncertainty surrounds some aspects. While expectations of more growth ahead seem realistic, it is also possible that the outcome could be a flat or decreased overall volume this year. Unpredictable (in terms of precise timing and impact) political influences could restrain the advance, suggesting that on a longer view a robust upwards trend is unlikely.


Economic foundations wobbling

Global economic output growth — as expressed by gross domestic product (GDP) — decelerated slightly over the past twelve months and looks set to continue slowing through 2019. Although this broad indicator does not have a fixed relationship with energy commodity use or more specifically coal import demand, it provides clues to the background for energy consumption.

During 2018 only the USA among the principal economies saw an improved performance. In the European Union and Japan slackening growth was clearly visible, while China’s expansion was restricted. The pattern evolving is widely expected to persist in the next twelve months when the USA also may join the list of slowing countries. International trade tensions are a contributory adverse influence.

At the beginning of last year there was fairly general optimism about a continuation of the economic upswing then under way. But circumstances deteriorated and, according to the latest International Monetary Fund update, world GDP growth was 3.7% in 2018, below the previous year’s 3.8%. Further slackening to 3.5% is forecast for this year with a proviso that “risks to global growth tilt to the downside”.

Among major coal importing countries, it could be perceived in several that slowing economic growth was acting as a moderating factor on energy and coal consumption. In India, however, the economy continued to perform well, resulting in buoyant electricity generation, industrial activity and steel production, all reflected in additional support for the domestic coal market and imports.

The world economy’s growth is seen as unlikely to strengthen this year, even if trade tensions — especially between the USA and China — are limited or eliminated. The activity cycle seems to have turned towards softening momentum in a wide range of countries. A more serious challenge for coal trade though is political rather than economic. An increasing intensity of government measures in numerous countries, designed to reduce carbon emissions and cut air pollution, appears set to remain at the forefront.

Continuing trade recovery

Coal trade during 2018 extended the upturn seen in the previous year. The trend was remarkable because pessimism had emerged earlier. After a 6% reduction in global seaborne coal trade in 2015 followed by a flat period in 2016, there were signs that the feared long-term declining trend resulting from switching to other energy sources had begun and would continue. In the past two years that theory has so far proved incorrect, with annual volumes reviving.

Recent estimates of the scale of 2018 growth vary. Calculations by the Australian Government Department of Industry, Innovation and Science (AGDIIS), published in late December, which are summarized in the accompanying table, show a 2% rise. Global coal trade including land movements, but mostly consisting of seaborne shipments, is put at 1,423mt last year, 24mt above the preceding year’s 1,399mt total.

Other reputable forecasters calculating specifically seaborne trade show a larger increase, based on provisional figures while awaiting more accurate or complete importer and exporter data. In mid-January the German coal importers association VDKI suggested that world seaborne coal trade grew by 3.7% in 2018, including a 3.6% rise in steam coal and a 4.4% rise in coking coal. Estimated expansion of around 4% for overall trade is corroborated by several analysts, based on available indications.

As highlighted above, both steam and coking coal trade sub-groups evidently saw higher volumes in the past twelve months. Coking coal trade, the smaller category comprising around one-fifth of all coal movements, benefited from stable or higher steel production in raw materials importing countries. Within the dominant category comprising the remaining four-fifths of movements, steam coal trade, volumes were boosted by buoyant electricity generation as well as growing coal-fired power station capacity and output in newer, smaller Asian importing countries.

Higher imports into India and China last year provided a sizeable addition to the world total. The volume received by India may have been over 20mt above the preceding annual figure, at around 225mt. China’s overall coal imports including low-grade lignite rose by 10mt or 4%, reaching 281mt (more than shown in the AGDIIS estimates calculated before year-end), although towards the end of the period weakness was prominent.

Another boost was derived from expanding purchases by a group of relatively small Asian importers — Malaysia, Pakistan, Philippines, Thailand and Vietnam. This group may have raised its steam coal imports by almost a fifth in 2018 to over 110mt, as new power stations began operating and power demand continued growing. By contrast, Europe’s steam coal imports still appear to be on a declining trend amid tightening regulations affecting coal-fired power output.

The geographical pattern of global coal trade was also affected by changes among suppliers. Some of these changes are broadly visible but final figures are awaited. According to preliminary calculations which may be revised, larger volumes exported by Indonesia, Australia and the USA propelled the overall trade expansion, partly offset by lower quantities exported by several other major suppliers.

Coal exports from Indonesia, the world’s largest supplier when low-grade lignite is included, appear to have increased in 2018 as a whole, following a 10% rise to 392mt in the first eleven months. Second largest supplier Australia apparently also raised its export total above the previous year’s 370mt. One early annual statistic published showed that exports from Richard’s Bay, comprising most of South Africa’s volume, declined by 4% in 2018, at 74mt.

Upwards and onwards in 2019?

Further expansion of global seaborne coal trade during 2019 seems quite likely. But the huge uncertainty surrounding imports by several major buyers points to the possibility of a different outcome, especially given the underlying negative influences affecting the market for this commodity. Unexpected changes in national policies, which perhaps can be labelled as the ‘known unknowns’, probably with mostly negative consequences for coal move­ments, could greatly alter the trend.

Among major importers, especially great uncertainty about how government policy decisions may impact on coal imports is evident in China. Other influences of a more commercial nature are prominent in China also. Yet changes in policy, which are only predictable as general possibilities with unclear timing and magnitude, often heavily determine short term trade flows. The effect of such a changed policy was seen towards the end of last year when abruptly China’s imports were tightly restricted, resulting in a sudden steep downturn within the final month.

Elsewhere, in numerous countries, national energy and specifically coal policy changes have occurred in recent years, almost always with adverse effects on coal trade. Although many other commodities traded internationally are subject to changing government policies, coal is particularly vulnerable because of its large contribution to harmful carbon emissions and air pollution. The downwards trend seen in Europe’s coal imports mainly reflects this factor.

Consequently predictions of significant growth in world seaborne coal trade in 2019, at a rate probably below last year’s fairly brisk pace, are partly speculative, incorporating much guesswork. However, currently there are signs of positive or potentially positive influences which could strengthen import demand in a number of countries, enough to more than offset foreseeable adverse influences which are also visible.

A slightly more cautious view is illustrated by the AGDIIS forecasts table, showing an almost flat trade outcome this year. The 2019 total for world trade in steam and coking coal (including land movements but mostly seaborne, as already mentioned) is forecast at 1,416mt, which is just 7mt or under 1% below last year’s estimated volume.

Imports into three major importing countries — China, Japan and South Korea, comprising over two-fifths of the world total — are expected to decline at rates in a 1% to 6% range, contrasting with a 3% rise in India. A breakdown of the voluminous ‘other countries’ category (also two-fifths of the total) is not provided: this element is expected to increase by 2%. In the ‘others’ sub-group is Europe, which is not forecast separately but presumably is expected to see a decline, implying that assumptions for the remaining countries chiefly in Asia are considered fairly bright.

Within this broad picture, a breakdown of world trade by coal type is also published by AGDIIS, although not shown in the table. Negative changes foreseen are concentrated in the steam coal segment. Steam coal trade is forecast to decrease marginally in 2019 by 17mt or just over 1%, to 1082mt. Conversely, metallurgical coal trade (coking coal plus steam coal grades used in the steel industry) is predicted to expand by 10mt or 3%, reaching 334mt.

According to other statistical sources which show the European Union separately, seaborne imports of coal into the EU from external origins probably totalled around 130mt last year, a large decrease of about 10%. Another large reduction could follow in 2019. This part of world coal trade may be seen as the major component with the clearest negative trend. The weakness results from environmental policy mandating reduced coal use, accompanied by a progressive switch towards alternative energy emphasising renewables, especially wind power generation.

Looking at positive aspects, rising imports into India and several smaller importers can be expected to support trade growth in the twelve months ahead. India’s coal use is rising rapidly while increases in domestic production of coal, and growth in rail transport capacity, is straining to match the pace of consumption expansion. Also benefiting imports, high quality coking coal for expanding steel output is mostly based on foreign supplies. In the ‘smaller Asian importers group’ comprised of Malaysia, Pakistan, Philippines, Thailand and Vietnam, coal imports related to rising coal-fired power generation seem set to see further growth.

Restraints on optimism

This analysis can be interpreted as pointing to another rise in global seaborne coal trade this year, and perhaps in the following twelve months as well, as a speculative outlook. Currently it seems realistic to envisage that a foreseeable 2019 increase probably will not be as strong as last year’s estimated rise, suggesting that a slow 1–2% growth rate is a more plausible expectation at present.

Nevertheless, it is clear that optimism about the longer trend of international coal trade is built on shaky foundations. In Europe particularly, and also in Japan, South Korea, India and China, together comprising almost three-quarters of total world imports, there are doubts about the strength of key drivers. Some influences eventually are more likely to turn negative than positive in the future, despite no clear signs of those changes occurring in the twelve months ahead.

One unfavourable background influence for 2019 is becoming more visible: the slowing world economy. This deceleration, although at present envisaged as being fairly modest, is likely to have a limiting effect on steel production in numerous countries, especially as weaker capital investment spending (usually steel-intensive) is evident. Adverse effects on steel output by blast furnace producers using imported coking coal are predictable. The direct implications of slowing economic growth for steam coal consumption are more difficult to assess, but negative effects can be foreseen.

A recent report by the International Energy Agency suggested that, in its ‘new policies scenario’ for the world as a whole, looking ahead over the next two decades, growth in coal consumption will be restrained by improvements in electricity supplies and renewable energy participation, and by efficiency gains. However, the report commented that “it is too soon to count coal out of the global power mix”. The average age of coal-fired power plants in Asia is less than 15 years, compared with around 40 years in advanced economies. As a result, only limited potential exists in the near future for obsolescence and replacement with alternative energy sources.

These observations emphasize again the significance of Asia in future global coal usage, and the imports which comprise a large part and also form a dominant proportion of global seaborne trade in coal. In many Asian countries, coal-fired electricity generation remains the preferred option, providing reliable and relatively cheap power supplies to satisfy rapidly rising demand for energy amid economic development progress. But the positive view of international coal trade, which can be shaped by such arguments, is tempered by intensifying downwards pressure from environmental policy, suggesting that prospects for trade growth are severely constrained.

Source: Richard Scott (Bulk Shipping Analysis)