When relationships start to fall apart, sometimes the warning signs have been detectable for a while. But they can also come to a much more abrupt, painful end, and in the case of China and its coal imports, it’s arguably somewhere between the two. The recent pace of decline in imports into China, last year the world’s largest coal importer, has taken some by surprise, and is having a significant impact.
Last year, seaborne coal trade hit 1.2 billion tonnes, more than a quarter of all dry bulk trade. In 2009, when coal trade totalled just over 800mt, low global coal prices sparked the beginning of China’s affair with imported coal. China had previously been a net coal exporter, but in just four years, China became the largest importer of coal globally, and steam and coking coal imports topped 260mt in 2013. China’s new relationship propelled total coal trade growth into double digits.
The Difficult Break-Up
By early 2014, China’s monthly coal imports had reached 30mt, enough to supply nearly 10% of its total coal needs. But some initial warning signs were soon visible, as greater attention was given to air pollution in China’s major cities. Before the year was out, Beijing had started to engineer a significant alteration to the relationship. Coal import taxes and quality limits were announced, and power plants were ordered to reduce reliance on imported coal. For the first time in years, China’s coal imports fell in 2014, by 10%.
The situation seems to have worsened so far this year. Slowing economic growth and strong hydro-power generation led to a drop in Chinese coal demand in Q1 2015 (coal-fired power generation fell 4% y-o-y, while steel output dropped by 2%). Efforts to protect the huge domestic coal mining industry (which produced nearly 4 billion tonnes of coal in 2014) have dealt a further blow to imports. Despite foreign coal prices remaining at low levels, in Q1 China’s seaborne imports totalled just 38mt, down nearly 50% y-o-y.
An Awkward Phase
The sharpness of the drop in imports this year has brought about a great deal of uncertainty. Is this really the beginning of the end? Since imports form only a small part of China’s total coal use, they can be highly sensitive to swings in demand. There is scope for volumes to improve in the rest of the year, but while projections for the remainder of 2015 vary massively, most are generally negative for the full year. The long-term consensus for China’s coal imports has also shifted and now seems to be that imports will continue to ease as focus increasingly switches to cleaner energy sources.
Time To Move On?
So, with memories of surging Chinese imports now fading, on current projections total seaborne coal trade looks set to fall this year for the first time in almost 30 years. Growth in global seaborne dry bulk trade may slow to nearer to 2% in 2015, from 5% last year; a situation unlikely to help to significantly improve bulkcarrier market conditions in the short-term. Can China’s waning coal demand be offset elsewhere? India is a possibility, as its coal imports continue to grow firmly. But just as the end of any good relationship can be hard to ‘get over’, China’s key role will be difficult to quickly replace.