Rates for the biggest coal carriers are poised to rebound from their worst-ever start to a year as China’s drive for cleaner coal doubles voyage distances, easing a record glut of shipping capacity.
China, the largest importer of the fuel, plans to buy coal with less sulfur and a higher heating value, a draft law obtained by Bloomberg News shows. That will mean fewer imports from Indonesia and more from South Africa and Australia, according to Oslo-based Pareto Securities AS. Rates for Capesizes will average $11,500 a day this year, 40 percent more than 2012, according to the median of nine analyst estimates compiled by Bloomberg. Traders may profit by buying freight swaps, which anticipate an average of about $7,500.
The world’s most-populous nation has 16 of the 20 most polluted global cities, according to the World Bank. It accounts for 49 percent of global coal consumption, BP Plc estimates. While Capesizes will also benefit from record trade in iron ore, their biggest cargo, the rates predicted in the survey would still be less than owners need to break even.
“The Chinese will have to go to at least Australia or further afield, and that would be a big boost,” said Nigel Prentis, the head of consultancy at Hartland Shipping Services Ltd., a London-based shipbroker. “Capesizes are much more dependent on iron-ore trade, so to have positive drivers from the coal market, that’s got to help.”
Rates for the 1,000-foot-long ships averaged $5,607 since the start of this year, the worst since at least 1999, according to the Baltic Exchange, the London-based publisher of costs on more than 50 maritime routes. Capesizes need about $16,700 to break even, Pareto Securities estimates. The biggest owners are Nippon Yusen K.K., Kawasaki Kisen Kaisha Ltd. and Mitsui O.S.K. Lines Ltd., according to shipbroker Clarkson Plc.
China may ban purchases of coal with a heating value below about 4,540 kilocalories a kilogram, a sulfur content above 1 percent and ash above 25 percent, the draft National Energy Administration regulation obtained by Bloomberg News shows. There is no timespan for when the plan will be implemented.
Indonesian brown coal, also known as lignite, wouldn’t meet the specifications in China’s draft law, according to Macquarie Group Ltd. China bought 55.8 million metric tons of the fuel from Indonesia in the past year, or enough to fill about 350 Capesizes, government data show.
The anticipated switch away from Indonesia will also benefit Capesizes because the vessels dominate trade from Australia and South Africa, according to Prentis. They are too big to dock in Indonesia, which typically uses smaller Panamaxes to haul its coal cargoes.
A voyage to Qinhuangdao in northeast China from Australia’s Newcastle is about 5,800 miles and from South Africa about 8,600 miles. That compares with 3,100 miles from the Indonesian coal-export center of Balikpapan.
About 60 million tons a year of Indonesian coal that previously went on Panamaxes to China will be displaced, boosting demand for Capesizes, Herman Billung, chief executive officer of Golden Ocean Management AS, said on a May 28 conference call. It operates vessels for Golden Ocean Group Ltd., chaired by John Fredriksen, the richest shipping investor.
China is also the biggest coal producer and may be able to replace some imports with domestic supply. Its output has grown for 14 consecutive years, reaching 3.65 billion tons in 2012, according to government data. Spare port capacity and railroad improvements will ease bottlenecks in getting fuel from fields in the north to industrial regions in the south, Macquarie says.
The nation will buy 18 percent of all seaborne coal cargoes this year, from 2.2 percent in 2008, according to London-based Clarkson. The International Monetary Fund cut its forecast for China’s economy on May 29, projecting growth of about 7.75 percent this year and next. In April, it estimated 8 percent this year and 8.2 percent in 2014.
Exporters are curbing expansion plans as prices retreat. Coal at Newcastle fell 4.2 percent to $86.80 a ton this year, data from McCloskey Group Ltd. show. Australian mining and energy projects valued at about A$150 billion ($147 billion) have been delayed or canceled in the past year, according to the government’s Bureau of Resources and Energy Economics.
The fuel accounted for 88 percent of spot Panamax bookings in the past year, Morgan Stanley estimates. That compares with 31 percent for Capesizes, according to Fotis Giannakoulis, a New York-based analyst at the bank.
Freight rates have slumped across merchant shipping. The industry had 20 percent more capacity than cargoes in March, its biggest glut since the early 1980s, according to Clarkson. The Capesize fleet almost doubled since 2008, when rates peaked at $234,000 a day, as trade expanded 30 percent.
Golden Ocean, the Hamilton, Bermuda-based owner of six Capesizes and 12 smaller carriers, will report net income of $37.1 million for this year, more than triple its 2012 profit, according to the mean of 12 analyst estimates. Shares of the company rose 70 percent to 6.68 kroner this year in Oslo trading.
Nippon Yusen, Kawasaki Kisen Kaisha and Mitsui O.S.K. also control oil tankers, container ships, gas carriers and other vessels. Kawasaki Kisen’s Capesizes represent about 36 percent of its shipping capacity, the highest proportion among the three companies, according to Clarkson.
Chinese coal imports will rise 11 percent to 197.7 million tons this year, Clarkson estimates. The figure includes thermal grades used in power plants and coking coal used in steel mills. World trade in the cargoes will expand 5 percent to 1.11 billion tons, the shipbroker predicts. Coal is the third-largest seaborne commodity after crude oil and iron ore.
“We’ll see more imports from long-haul distances like Australia and South Africa, and those will favor Capesizes,” said Eirik Haavaldsen, an analyst at Pareto in Oslo. “We do see an improving balance for the Capesize market. They’ve been through the worst.”