30 July 2024

Cape owners contend with soaring Mongolian coal shipments by rail to China

The capesize business is experiencing some of the greatest shifts in global trades in the 2020s among all shipping segments.

As well as the growth of West Africa exports of bauxite – and soon to be iron ore – to China, cape owners are having to contend with the growth of Mongolian and Russian exports to the People’s Republic, something that slashes tonne-miles for dry bulk’s big ships.

“The increasing dominance of rail-borne supply from Mongolia, coupled with rising Russian imports, is reshaping trade flows and exerting downward pressure on seaborne freight rates,” Greece’s Xclusiv Shipbrokers argued in a recent market update

“The burgeoning coal trade between China, Mongolia, and Russia is poised to probably reshape the dry bulk shipping landscape,” Xclusiv suggested, saying that the rapid expansion of Mongolia’s coal production, coupled with significant investments in rail infrastructure is diverting a substantial volume of coal, away from seaborne transport. This trend, Xclusiv said, is exacerbated by the country’s growing imports of Russian coal, which, due to shorter shipping distances, will further erode demand for capesize vessels.

“Massive potential trade growth is expected between Mongolia and China due to the commencement of the railway network between the two countries in 2023 and the construction of two additional rail networks underway,” UK shipping consultants Drewry said in a recent report.

“The expansion in overland trade from Mongolia and the tepid growth in imports from Australia will dampen shipping demand,” Drewry claimed, saying that China’s coking coal imports from Mongolia have been “skyrocketing”.

Mongolia’s coking coal production more than doubled year-on-year in 2023, with more than 90% of the output headed to China.

Furthermore, China’s seaborne imports of coking coal from nearby Russia have been strengthening, registering a growth of 97% and 24% in 2022 and 2023, respectively, according to Drewry.

China’s imports from Australia remained “subdued” following the lifting of a ban, with Drewry forecasting there is no chance Australia will manage to get back to pre-ban levels of exports to the People’s Republic this year.

For every tonne of coal switched from Australia to Russia, the tonne-mile demand may reduce 62%, according to Drewry estimates.

Drewry claimed that China’s strategic shift towards rail-based coal imports from Mongolia and increased reliance on Russian coal marks a “transformative moment” for dry bulk shipping.

“The new rail networks and China’s heavy investments in Mongolia signal a decisive move away from seaborne trade, drastically reducing the demand for long-haul shipping. As Chinese steel mills face tight margins and weak domestic demand, the preference for closer, cost-effective sources will continue to reshape trade dynamics,” Drewry concluded.

A recent article from China International Capital Corporation (CICC) was bullish on Mongolian coal prospects as a result of price and comparative quality.

“We think Mongolia will be an important coal supplier as China’s coal industry adopts more stringent safety measures and coal output from major coal-producing areas in China drops. In our view, downstream clients will be more motivated to purchase Mongolian coal, leading to growth in Mongolian coal imports to China,” the report predicted.

Dionysios Tsilioris, a researcher with Greece’s URSA Shipbrokers, told Splash: “China is entering a period of stability in seaborne steam coal imports and overall usage. This follows a very strong first half of 2024, as hydropower rebounds and domestic production revamps, with expectations that this year’s overall Chinese steam coal imports will meet last year’s record volumes or fall somewhat below them.”

Not everyone is buying into the overland hype.

Ralph Leszczynski, head of research at Italian broker Banchero Costa, for instance, told Splash that Mongolian or Russian coal was not competing straight on with Australia or Indonesia given the completely different logistics. Rather the increased output from North Asia was likely to compete or add on to domestic Chinese production which is also mainly sourced from areas in the north of China close to the Mongolian border like Inner Mongolia and Shanxi provinces.

Overland shipped coal imports in the first half accounted for roughly one-fifth of China’s total coal imports, with the growth of overland and seaborne imports growing at the same rates, Leszczynski pointed out.

“Overland imports of coal are increasing, but more or less as fast as seaborne coal imports,” Leszczynski said, noting that overall, it has so far been an exceptionally positive year for Chinese coal imports.