Growth in Chinese seaborne steam coal imports has been remarkable in recent years, with imports growing from 14mt in 2008 to 102mt in 2011. Imports are projected to rise by a further 26% in 2012 to 128mt, contributing significantly to global coal trade growth. In recent months, Chinese imports have reached historically high levels, but it is uncertain whether demand will continue at the same level in the short-term.

When The Price is Right

The most significant driver behind the recent strong imports has been the differential between prices of international coal and domestic Chinese coal. As shown in the Graph of the Month, when Indonesian coal prices exceeded Chinese prices in Q1 2011, monthly imports subsequently halved from around 8mt to 4mt.

The reversal of this situation in April-December 2011, and in March-July 2012 meant that foreign coal was more competitive, incentivising higher seaborne imports. Imports have been consistently firm this year, and totalled 92mt in January-August 2012, up 70% y-o-y. However, the price differential has now narrowed again.

Powerful Factors?

Imports are greatly affected by movements in price as China’s domestic coal reserves mean that it can withdraw from the market if prices are uncompetitive. However, other factors can also have an effect.

Electricity generation by thermal power sources has recently slowed, with output in August 2012 down 7% y-o-y. While growth in total output has slowed, a recent rise in hydro-powered generation has also contributed to lower thermal power demand since Q1 2012. This is likely to have led to a build-up of coal stocks. As shown on the graph, the index of total coal stocks in China exceeded 140 points in June 2012, equal to 380mt. This high inventory could also possibly dampen import demand in the Autumn.

Quantity and Quality

So, while price movements and high stock levels may mean that the short-term outlook for imports is potentially less positive, it is clear that firm imports so far this year have contributed to bulker demand growth. The increasing share of Australian coal at the expense of Indonesian material has also helped, with steam coal tonne-mile imports doubling y-o-y in the year to date. Australia’s share of China’s imports has risen from 9% in March 2011 to 34% in August 2012, largely due to the recovery from flooding in Q1 2011. However, imports from Australia have also recently exceeded pre-flood levels, perhaps as lower coal prices and freight costs have enabled and incentivised greater Chinese purchases of higher-quality Australian coal over Indonesian coal.

So, if the share of Australian coal remains high in the rest of the year, greater tonne-mile demand may help offset the impact of a potential drop in import volumes. Even if tonne-mile demand fell in Q4, Chinese imports would still be on track to have contributed significantly to bulker demand growth in full year 2012.

Source: Clarkson Research Services