Relaxing Chinese coal policies seen as very supportive of freight rates

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A surge in hydro-power, cleaner air in the Capital and a need to further stimulate the economy will see increased demand for seaborne coal supplies to China this winter. That is good news for freight.

China's electricity production rose by 7% to a record 640.5 billion kilowatt hours of electricity in August of which 72% was produced from coal. Daily thermal coal use by China’s major power generators averaged 769,000 tons in August, typically a peak demand season. In spite of this Hebei province surrounding Beijing saw monthly air pollution targets met for the first time.

China has set targets for alternative energy sources to meet 15 percent of its energy requirements by 2020 and for the share of non-fossil fuel use to be 20 percent by 2030. By current measures, that standard is already now being met, as 19.8 percent of power produced in August came from hydro-power, and the remaining 9.1 percent from gas, nuclear and peripheral renewables. According to a memo from the U.S. Embassy in Beijing, residents of the Capital have been breathing some of the cleanest air in a decade as they begin to reap the benefits of the anti-smog initiatives. Five of the seven lowest monthly pollution readings in the capital since 2008, have been recorded since the beginning of last summer.

This has caused China's Ministry of Ecology and Environment to recommend a relaxation of policies on coal usage. The Ministry this week trimmed its pollution reduction target to 3% from 5% for the period October 2018 through to March 2019, opening the door to a substantial increase in the use of coal for power production in the country's northern provinces who may now be allowed to set their own winter output curbs for heavy industry.

The move comes as China faces strong headwinds in international trade as a result of the very public economic disputes with the United States, and the Chinese government is again stimulating the economy to stave off significant pullback in domestic growth.

Increasing coal consumption through the winter season, should translate into further growth in imports, currently accounting for 7.7 percent of China's coal demand. 2017 saw 271 million tonnes shipped in mainly from Indonesia and Australia.

Freight rates for coal cargoes shipped from Indonesia and Australia on dry cargo vessels are now breaking out of their year to date range, to the upside and could see a further 30 percent increase into peak demand season in November.

Cargoes of 50,000 tonnes from Taboneo to Guangzhou are currently pricing at $8.75 per tonne, a new high for the year, whilst 45,000 tonne cargoes from Taboneo to Nantong are being shipped for $11.45 per tonne, the highest level seen since March. Australian cargoes from Hay Point to Zhoushan moving on larger Post-Panamax vessels (90,000 dwt) have reached $12 per tonne, a 20% increase since the start of the year.

Should the onset of an El Nino weather phenomenon cause less rain to fall in China this winter, the hydro-power component of the energy mix will be negatively affected. This in turn would further boost demand for coal, supporting a bullish freight rate environment.

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