Coal trade looking brighter

An upturn in global coal trade looks likely in 2023, after a pause last year. Trade volume may approach the peak seen four years ago. But pessimism about the longer term trend still overshadows the view ahead, amid an international push to reduce greenhouse gas emissions by shifting energy use towards cleaner alternatives.

Prospects for coal trade are an important element of the outlook for the dry bulk freight market. Coal comprises well over a fifth of all global seaborne dry bulk trade’s volume, employing many sizes of bulk carrier from handysize up to capesize and newcastlemax. A large proportion of this trade is on long-haul routes, enhancing the commodity’s role as a valuable employment source.

After reaching a peak volume in 2019 world coal trade fell, followed by a partial recovery. Last year the trend flattened and some indications suggested limited potential for further growth before an extended downwards trend became a feature. But in recent months estimates for 2023 have tended to become more positive, with some forecasts pointing to a total exceeding that of the previous twelve months by 3-5% or possibly more. If the upper end of the forecast range is seen this year, the total will be close to the all-time record level.

Energy demand contrasts

Looking at events unfolding over the past few years, two especially significant influences affected global energy usage and formed the backdrop for changes in coal consumption and import demand. These influences were the coronavirus pandemic, and the war in Ukraine. Also, through this period an underlying influence gaining more momentum was the decarbonisation imperative, with strategies focused on cutting fossil fuels usage.

In the pandemic’s first twelve months starting in early 2020 energy consumption in many countries was weakened by government regulations compulsorily restricting activity to limit the spread of the virus. Reduced commercial and industrial output and transport movements resulted, lowering economic growth, accompanied by receding energy and coal use. Later, in 2021, when vaccines were introduced and availability widened, restrictions were eased and a pickup in various economic activities and energy use unfolded.

At the beginning of 2022 the world economy’s recovery from the pandemic’s impact was expected to continue firmly, albeit not as rapidly as in the initial rebound. The predicted progress was not achieved, because of consequences arising from Russia’s invasion of Ukraine at the end of February last year and the ensuing war continuing into this year. A global energy crisis with supply shortages and high prices occurred, greatly exacerbating inflationary trends already under way. Measures needed to control inflation were reflected in a world economic slowdown during 2022 that, in turn, caused further changes restraining the trend in energy consumption.

Statistics revealing the world’s energy use in the past three years emphasise the changes affecting coal usage and trade. Data published by the Energy Institute shows world primary energy consumption declining in 2020 by -3.0% from the previous year. For comparison, this fall was a bigger weakening than occurred in the severe recession after the world financial crisis more than a decade ago, when energy consumption during 2009 still grew, albeit minimally, by +0.4%. Following the 2020 downturn, a strong rebound in 2021 was recorded with 5.9% growth, decelerating to a 1.1% increase in 2022.

Focus on energy use patterns

Also assisting in explaining the coal segment’s evolution is changes in the pattern of primary energy consumption by fuel type seen in the past few years, as shown by EI statistics. The shares in world energy consumption of the largest sources – oil, natural gas and coal – have all diminished since 2019, reducing the combined share of this group by 2.5 percentage points, to just under 82% in 2022. Coal’s individual share, however, was only marginally reduced to 26.7%. By contrast the relatively small share of renewable energy (wind and solar) jumped from 5.0%, to 7.5%, continuing an upwards trend from almost nil a decade ago. The remaining two contributors – nuclear energy and hydro-power – maintained stable shares at about 4% and 7%.

Changes among fuels used in power stations for electricity generation are a more direct indicator for coal consumption. Within global seaborne coal trade the largest part, four-fifths, is steam (or thermal) coal, and the majority of movements in this sub-category are linked with usage in power stations. Coal and natural gas continue to dominate world electricity generation. In 2019 these two fuels had market shares of 36.4% and 23.4% respectively. Three years later in 2022 the shares were lower at 35.4% and 22.7%. The smaller nuclear, hydro and oil shares were also down. Conversely, power generated from renewables rose by four percentage points to 14.4%.

For the remaining one-fifth of global seaborne coal trade comprised of coking (or metallurgical coal), a broad indicator of trends is steel consumption. In 2020 many coking coal importing countries saw reduced steel consumption as the pandemic unfolded although China – over half of the world total – achieved a large increase. Global steel use was marginally (+0.6%) higher based on World Steel Association figures, followed by a 2.9% increase in 2021 when there was a widespread rebound despite a downturn in China. During 2022 amid the energy crisis and high fuel prices, a fall of -4.0% in the world’s steel use was seen, including the majority of countries importing raw materials.

How coal trade evolved

Collapsing energy consumption in many countries caused by the pandemic was reflected in a world seaborne coal trade decline in 2020. The total was down by 119 million tonnes or 9% from the previous year’s 1300 million tonnes peak, to 1181mt, according to Clarksons Research data included in the chart. Trade volume then partially recovered, increasing by 45mt (4%) to 1226mt in 2021 when the pandemic’s adverse effects began to recede, before stabilising at an almost unchanged 1229mt in 2022.

Last year’s apparent stability in the world coal trade total was somewhat misleading. It resulted from sharply differing changes, both upwards and downwards, among the principal importers – China, India, Japan, South Korea and the European region. While import volumes in some countries saw only limited variations, others experienced huge swings. A higher European imports volume was the most dramatic variation, accompanied by a higher volume into India, and a lower volume into China. Moreover changes in geographical trade patterns featured. International sanctions imposed on Russia, a major coal supplier, caused a rearrangement of routes and volumes among exporters, benefiting tonne-miles and demand for bulk carriers.

An increase of 41mt in coal imports into the European Union and United Kingdom in 2022, compared with the previous year, raised the annual quantity to 121mt, the highest since four years earlier. This expansion of just over a third reflected a strategy to boost alternative energy supplies. Most pipeline imports of natural gas from Russia – on which Europe had been greatly dependent for energy over many years – were cut off after the invasion of Ukraine, causing an ensuing energy crisis and urgent need to arrange alternatives.

India’s imports also grew rapidly in 2022 by 39mt or 19%, to 243mt, benefiting from a revival of economic activity with growth in coal consumption outpacing that of domestic coal production. By contrast in China a steep 47mt (17%) downturn in seaborne imports to 234mt reflected a weak economy constrained by pandemic restrictions, higher domestic coal output and increased overland imports from Mongolia. In Japan and South Korea limited positive changes in imports were recorded, a 2mt rise in Japan to 178mt, and a 1mt rise in South Korea, to 120mt.

In addition to the large changes in imports by Europe, India and China, plus smaller changes in Japan and South Korea, some variations among other coal importing countries were seen last year. Taiwan’s 2022 total was 6mt (9%) lower at 63mt. A group of Asian countries that became more prominent buyers in recent years – Malaysia, Pakistan, Philippines, Thailand and Vietnam – experienced a 5mt (4%) decline in steam coal imports to about 125mt.

Signs of a trade upturn

What are the indications for global seaborne coal trade’s performance this year? Earlier signs of a pickup during 2023 were muted. A small increase of perhaps 1-2% seemed probable, although expectations were based on rather tentative assumptions. While imports into some countries seemed likely to grow, a possibility of negative changes elsewhere was evident, and it was hard to be certain that the net impact of such a combination would result in the world total growing. Prospects for imports into China, India and Europe were especially unclear, being subject to influences that were difficult to predict.

But in recent weeks clearer indications of an upturn emerging have been seen. Although Europe’s imports are quite likely to moderate after an exceptionally large expansion last year, the outlook for other large importers suggests higher volumes. These could contribute to overall brisk growth in world seaborne coal trade of up to 5% or more in 2023 as a whole, raising the annual volume back to around the previous peak level recorded four years ago. Most of the additional quantity is likely to be steam coal, supplemented by some extra coking coal.

Nevertheless a rise of this magnitude is heavily dependent on forecasts of strong growth in China’s imports. In the 2023 first half seaborne imports into China were much higher, although the comparison is distorted by an unusually low level seen in last year’s same period. Reported official figures show the coal volume imported by Chinese buyers (including land movements) almost doubling (+93%) to 222mt. Second half imports may be lower, based on some signs, suggesting that the annual growth rate will be well below that of the first half.

The robust performance of China’s imports in recent months has been attributed to several influences. Since covid restrictions were suddenly cancelled at the end of last year, the economy has revived, albeit not as rapidly as many observers expected, causing higher energy demand. While domestic coal production increased, buoyant coal consumption, stockbuilding to improve energy security, and attractive international coal prices had a positive impact on imports.

In India, brisk economic growth supporting output in the power generation, steel production, and cement manufacturing industries has benefited coal consumption. Despite a long-standing policy target of reducing or eliminating coal imports, a consistent downwards trend has not yet proved attainable. Boosted by stockbuilding, foreign purchases are rising. Conversely, in Europe the energy crisis has eased and reports suggest coal stocks are now too high, resulting in reduced pressure on imports to satisfy essential energy needs.

A sombre longer term view

In the immediate future the outlook for the world energy market as a whole, and coal consumption and import demand, is still dominated by two aspects. Repercussions for global energy supplies and prices from the war in Ukraine, and the progress of economic recovery in numerous countries after the setback and disruption caused by the pandemic, are prominent influences. Uncertainty about events ahead is compounded by ongoing lack of clarity about how government policy decisions and resulting changes, in a number of countries, will unfold.

Over the longer term, coal use and trade is likely to be greatly determined by the international community’s steps to reduce greenhouse gas emissions. The shift away from coal used in power generation in numerous countries, towards cleaner alternative energy supplies is widely expected to persist. In some other countries a sustained drive for self-sufficiency in coal resources could add to downwards pressure on import demand, further emphasising an unfavourable outlook.

A report published at the end of last year by the International Energy Agency suggested that annual global coal demand could remain at around the 8 billion tonnes level reached in 2022 during the period through 2025. The IEA acknowledged that the outcome could be different, given the uncertainties surrounding energy supplies, and “a lurch into growth or contraction is possible”. It was stated that such a movement could be driven by changes in global economic activity, weather conditions, fuel prices or government policies, among other potential variables.

The IEA analysts indicated that these expectations for coal demand were consistent with expectations of a sharp decline in annual world steam coal trade of about 10% during the period to 2025. But a partial offset from envisaged growth of about 6% in the coking coal segment implies an overall 7% coal trade reduction. This pattern of future trade was expected to result from two influences. First, countries particularly in Europe “will adapt to and overcome the current energy crisis and return to their coal phase-out paths”. Second, China’s and India’s continued efforts to secure energy supplies would lead to higher domestic output and lower imports.

Arguably this perspective is a plausible view of future prospects over the next few years, even though the precise timing of the trade reduction process starting is more difficult to gauge. Many developments confirm the environmental pressures affecting global coal trade, and point to an extended downwards trend eventually. Evidence of diminishing coal use, especially in power generation in many countries, is multiplying despite the recent revival of coal as a temporary measure designed to strengthen energy security.
Source: Article for Hellenic Shipping News Worldwide, By Mr. Richard Scott FICS, Managing director, Bulk Shipping Analysis and visiting lecturer, London universities