COAL TRADE LOOKING MORE LIVELY

TRADE & COMMODITIES Coal trade looking more lively

Global coal trade has revived in the past twelve months. After a severe setback in the previous year, over half of the decline was reversed in 2021. Amid an upturn in world economic activity and energy consumption as the coronavirus pandemic’s adverse effects receded, coal demand and imports in many countries strengthened last year. Another increase seems possible in 2022, but longer-term prospects remain negative because of the general shift towards cleaner energy.

Based on provisional estimates, a vigorous recovery in world seaborne coal trade last year probably exceeded 70mt (million tonnes), following the previous downturn of about 120mt when imports into all the main importing countries weakened. The 2021 expansion was broadly spread among importers, assisted by tight supplies of alternative energy (especially natural gas and renewables) in several countries, benefiting numerous coal export suppliers.

While the recovery in energy consumption around the world looks set to continue this year, there is less certainty about coal’s participation. Some signs suggest that any further growth in coal trade will be limited in extent and duration. A possibility of a flattening or even a reduction in 2022 is evident. The recent international climate change conference intensified attention on the priority of reducing greenhouse gas emissions and cutting coal use. Nevertheless, coal is likely to remain a vital energy mix component in many countries, supporting coal import demand.

SUPPORTIVE ECONOMIC ACTIVITY Activity in the world economy generally, and in many energy-consuming industries, regained momentum in the past twelve months when the worst effects of the pandemic receded. Energy demand revived and coal usage participated in the revival. Based on the broad indicator of gross domestic product (GDP), the world economy’s growth in 2021 was 5.9% according to the International Monetary

Richard Scott, Bulk Shipping Analysis

China 2017 2018 2019 2020 2021 2022*

2022 % change** 217 237 258 238 277 260 –6

Japan

186 183 180 168 173 175 +1 India 203 231 250 222 217 230 +6 South Korea 141 141 135 117 123 120 –2 EU+UK 145 138 109 67 86 90 –5 other importers 311 334 352 353 363 375 +3 total 1,203 1,264 1,284 1,165 1,239 1,250 +1

* Bulk Shipping Analysis 2022 forecast ** 2022 forecast compared with previous year source: Clarksons Research and Bulk Shipping Analysis, January 2022

Fund’s latest estimates, after a –3.1% contraction in 2020. Sustained albeit moderating growth is expected this year.

An improving trend among coalimporting countries was widespread during 2021. Turnarounds from large contractions in economic activity to brisk expansions were seen in the European Union and India. In Japan, after a downturn, modest economic growth was seen. By contrast, in China the economy had slowed sharply but not contracted previously, followed by an acceleration from slow to much faster growth in 2021.

Over the year ahead all these economies potentially could see sustained advances at varying rates, but great uncertainty is a prominent feature.

In January this year the IMF published cautiously upbeat forecasts, albeit emphasizing downside risks. World GDP is predicted to extend the recovery process, growing by 4.4% in 2022, still well above trend expansion. However, IMF analysts commented that “the global economy enters 2022 in a weaker position than previously expected” due to ongoing pandemic problems, supply disruptions, and more entrenched inflation.

Recovering economic activity is accompanied by rising energy demand, and the impact of this relationship has been clearly visible in the past twelve months. Another associated development is the positive effect on coal demand in particular, underlining how heavily dependent many large energy-consuming countries continue to be on this fuel source. Despite the downwards pressure from environmental policies, electricity generation, steel production and some other industries in numerous countries are likely to continue relying on coal.

An influence which probably will remain at the forefront over the year ahead, as a determinant of coal trade, is political decisions mainly reflecting the decarbonization agenda and the move towards cleaner energy supplies. In some countries, especially among the largest coal importers, government measures to limit and eventually eliminate carbon emissions and also cut air pollution are having increasingly large effects on international coal movements.

FLUCTUATING TRADE TREND World seaborne coal trade slowed to 2% growth in 2019 before abruptly falling by 9% in 2020 when the pandemic unfolded. Subsequently, expectations of an upturn exceeding 5% in 2021 (see ‘Coal trade may regain some vigour’, Dry Cargo International, January 2021) proved realistic. Both steam coal and coking coal segments are estimated to have recorded similar percentage increases in the past twelve months.

Trends among the largest importers and for world trade as a whole are shown in the table above, based on historical data compiled by Clarksons Research and calculations for 2022 by Bulk Shipping Analysis. These figures show 6.4% growth in 2021, raising the total to 1,239mt, an increase of 74mt from the previous year’s volume.

For comparison, an estimate published in late December by the Australian Government’s Department of Industry, Science, Energy and Resources suggested a less vigorous 3.4% increase in 2021. This calculation is based on all international coal trade including movements on overland routes, and so is not directly comparable. Estimates calculated before or just after the end of an annual period are always provisional, awaiting more complete exporter or importer figures and therefore may be revised significantly.

Last year coking coal, the smaller category comprising around one-fifth of all seaborne coal movements, was affected by higher steel production in many countries relying on imported fuel. Within the dominant steam coal category, comprising the remaining four-fifths of trade, import volumes were boosted by stronger demand from power generation and other industries.

In the two largest importing countries provisional calculations show contrasting changes in purchases last year. India’s coal imports apparently were about 2% lower at below 220mt, despite the country’s rebounding economic activity and stronger industrial output. In China a tight domestic coal market, reflecting greater power demand in a strengthening economy resulted in seaborne coal imports including low quality lignite supplies rising by about 15% to over 270mt.

An element of global trade which has been a firm support with vigorous expansion in recent years turned negative in 2021. A group of smaller Asian importers — Malaysia, Pakistan, Philippines, Thailand and Vietnam — became a much more prominent trade segment amid rising power station capacity and continued electricity demand growth. But last year saw a lower overall group volume. Steam coal imports appear to have declined by about 4% to around 135mt because of a sharp reduction in Vietnam.

By contrast imports into European countries last year expanded, with the incremental volume recovering about half of the previous year’s dramatic reduction. The annual European Union plus United Kingdom seaborne imports total in 2021 may have been more than a quarter higher than recorded in the preceding twelve months, at over 85mt. Shortages of other energy supplies, especially gas and renewables, and the pickup in steel production raised steam and coking coal demand respectively.

Among coal suppliers numerous changes affected the geographical pattern of global coal trade. Final 2021 figures are awaited but some annual changes are already clearly visible. In the coking coal segment which is dominated by Australia’s exports, the main beneficiaries of extra trade were the USA and Russia. Changes among steam coal exporters saw rebounds

in volumes supplied by Indonesia (the top supplier), Russia, Colombia and the USA, while Australia’s shipments were flat.

CONSOLIDATING IMPORT DEMAND? Following last year’s upturn in global coal trade, how likely is an extended period of growth in 2022? Another strong annual expansion may seem an unlikely outcome given the headwinds faced by the coal market, but modest further growth could be seen. In several major importing countries, however, huge uncertainty surrounds prospects in the immediate future and the next annual change may be up or down, or perhaps volumes will remain flat. Prospects for some countries’ coal consumption and domestic production (where relevant) are unclear, while political influences which are often unpredictable are a puzzle.

Moreover, longer-term negative impulses pervading the international coal market are maintaining ongoing downwards pressure. These influences hold back potential for the coal trade rebound to continue and probably will prevent more brisk growth this year. Changes in national policies on energy supplies — within which the broad strategy is visible, but the timing and extent of specific measures is difficult to predict — are likely to adversely affect coal use and movements. The global impact of policy trends is set to drive a decline in coal trade over the decade ahead.

An especially notable uncertainty about future global trade drivers is coal import demand in China. The 2021 strong expansion was widely unforeseen. This year a continued upwards trend may seem unlikely, and a flat or perhaps more predictable reduction is foreseeable. While buying activity reflects commercial factors, short-term government policy decisions and controls often emerge, complicating analysis and intensifying doubts. General indications about these policies are known, or may be envisaged, but the timing and magnitude of effects on coal imports are much less clear. Short-term trade flows may change greatly.

The pattern of influences in recent years in many countries has been consequences, usually adverse, for coal trade resulting from national energy and sometimes specifically coal policy variations. This pattern seems set to persist in the future. Measures introduced, with the intention of benefiting the environment, have prioritized switching away from coal-fired power generation towards cleaner natural gas or the often preferred choice of renewable energy supplies. In Europe in particular the emphasis has severely diminished coal-fired power plant capacity and electricity generation and decimated the coal market.

Consequently predictions for world seaborne coal trade in 2022 are based partly on speculation and guesses, albeit informed by perceptions about underlying trends. Although current signs tend to point to stronger import demand in a number of countries during the next twelve months, it is not completely clear whether such rises will be sufficient to offset adverse pressures.

A POSITIVE FORECAST Among positive views of the coal trade outlook this year, an analysis was published several weeks ago by the Australian Government’s Industry Department. According to these calculations, world trade in steam and coking coal could total 1,418mt in 2022, a 38mt or 3% increase from last year’s estimated 1380mt volume. The figures include some land movements but are mostly seaborne. Steam coal trade this year is expected to increase by about 2%, while coking coal trade advances more

briskly by over 4%.

Expectations vary widely among the main importers. Optimism is greatest for India, which is expected to see a 5% increase, while China’s imports could rise by 2%. By contrast, Japan’s volume is not expected to change much, rising by under 1%, but in South Korea a sizeable 3% reduction is envisaged. These four countries together comprise over three fifths of the world total.

The optimistic view of India’s purchases in the twelve months ahead is based on an expected increase in coal use which will exceed growth in domestic coal production and supplies. A policy of reducing dependence on foreign supplies by boosting output from domestic mines has been reconfirmed and some progress towards this target has been achieved. But potential for higher imports in the next twelve months is still evident.

A reduction in South Korea’s total during 2022 reflects signs of a weakening trend in steam coal usage. The government is planning to reduce coal-fired power generation over an extended period while switching towards cleaner energy sources. In Japan also a policy of reducing coal consumption has been adopted, but new coal-fired power plants are under construction. During the short term last year’s higher coal imports volume may be maintained as a result of the slow pace of reconnecting nuclear plants which have been idle for some time.

In this forecast of world trade many other coal importers are not specified individually. A large category of unspecified countries, comprising about two-fifths of the world total, may see an overall increase of about 4% in 2022. The European Union is one of the components, and some independent estimates suggest further enlargement of import demand this year. Nevertheless a longer term negative trend in Europe is still expected to result from energy and environmental policies unfolding.

GROWTH IMPONDERABLES Several prominent influences together are likely to determine whether coal trade continues to recover this year and, if so, by how much. The pace and composition of the global economic rebound and its consequences for energy demand will be significant. Also, the relationship and competitiveness of coal with alternative energy supplies, and the extent of pressure from decarbonization policies will be instrumental.

All these factors have unclear elements, possibly suggesting that the upwards trend in world seaborne coal trade resuming last year will be difficult to sustain. Yet there is clear potential for positive developments during 2022 which could be enough to raise the total by 1–2% at least. Based on present indications it still seems unlikely that the peak volume seen two years ago in 2019 will be regained either this year or later.

Extending a positive outlook to envisage a continued upwards trend is not supported by much evidence. Potential for expansion is clearly limited. Even if growth persists into next year, the longer term prospects from 2023 and beyond are surrounded by negative pressures.

A slackening rate of economic growth in a number of coal-importing countries around the world, as envisaged by the IMF and other forecasters, may alleviate the upwards pressure on energy demand. But it seems possible that energy supplies will remain tight and, within this broad trend, coal demand could remain well supported.

Nevertheless the impact of the normal economic and commercial drivers of coal use and imports will be modified by the effects of environmental policies and attitudes adopted by governments, businesses and consumers. The outcome of this pattern is visible as an influence restricting and probably ultimately reducing coal trade.

Despite an intensified global emphasis on decarbonization, signs of an imminent collapse in coal demand are absent. A report published at the end of last year by the International Energy Agency suggested that “coal demand is anticipated to grow slower after the strong recovery of 2021”. Continued expansion indicated that “global coal demand may well hit a new all-time high in the next two years”. The global trend “will be shaped largely by China and India” according to IEA analysts. Although China’s demand expansion is expected to be minimal, India’s could advance more rapidly.

After the 2021 rebound, world coal trade could remain on a plateau to 2024 based on the IEA’s view, with steam coal trade declining by an average 1.9% annually, contrasting with coking coal trade rising at a 2.8% annual rate. Looking at individual buyers, it is suggested that steam coal imports into China “are probably the most uncertain”. This outlook results in overall global coal trade remaining stable over the next three years. DCi