The power crunch in China appears to have a broad implication for the shipping sector. The electricity squeeze has led at least 10 Chinese provinces, including some manufacturing hubs, to suspend factory productions and even household utilities in the past weeks. The reason for this has mixed the country’s stricter emission rules and soaring coal prices. The record high price of thermal coal, the use of which accounts for about two-thirds of China’s power generation, has made local power plants reluctant to ramp up output. As domestic electricity price is capped by the government, the more they produce now the more they will lose.
China’s tension with Australia, the world’s second-largest coal exporter, has certainly contributed to the situation. Although Beijing has increased the imports from other countries, such as Indonesia and Mongolia, after an unofficial ban on Australian coal last year, it has failed to fill up the gap — especially amid a surge in demand driven by a strong economic recovery this year. The demand for energy is expected to rise further as the winter peak season approaches. China will need to import more coal. That has fueled the expectation that the restrictions on Australian exports may be relaxed, which could change the trade patterns of many panamax dry bulkers. “I believe that soon the government might be forced into easing the ban on Australian coal, as that would allow more coal to be imported and ease some pressure on domestic coal prices,” said Banchero Costa head of research Ralph Leszczynski.
Meanwhile, the closed factories — including aluminum smelters, food processers and electronic component makers — are compounding concerns over a turn of the current container shipping super cycle. Freight rate index from the Shanghai Shipping Exchange have already shown signs of stalling ahead of the Chinese Golden Week holiday in October. In the real market, spot rates offered on China-US west coast trade has tanked to around $10,000 per feu from $15,000 per feu in early September, according to a Shanghai-based forwarder. With the halt of factory activities shipments are being delayed, putting pressure on cargo demand, the person explained. “And some scalper agents are dumping the slots they have been hoarding before the Golden Week in fear of a sharp correction of an already inflated freight market.”
Volumes were already slowing down because of the October holidays and the end of Christmas and New Year cargo cut offs, said Liner Research Services analyst Hua Joo Tan. “The middle of October will be a key test if the rates will hold,” said Mr Tan. “Although the headlines are all about the long queue of ships at Los Angeles, this is less important than the actual demand out of China.” The factory shutdowns could put another dent on the demand side, at least temporarily, he added. However, the oil shipping markets — at least investors of tanker companies — seems to have been perked up by the Chinese power crisis. The share prices of Shanghai and Hong Kong-listed Cosco Shipping Energy Transport surged 10% and 16%, respectively, on Tuesday. Chinese power plants do not use crude oil in any form for power generation these days. But the headlines about the blackouts and suspended assembly lines became as an important reminder or catalyst to investors, according to Shanghai-based SWS Securities analyst Yan Hai i.e., energy is in short supply and the production as well as trading for oil, a key part of it, will have to increase. “So, the market thinks of the tanker companies, which are in the bottom of the cycle and bound to benefit [from the trade recovery],” said Mr Yan.
In addition, some factories might decide to install and use private diesel-fuel generators to provide electricity to continue operations should they expect the disruption of power supply to last, Mr Leszczynski added. “We have seen this happen in previous periods of power shortages and is the norm in countries with chronically unreliable energy grids, such as Myanmar.” This would give a boost to clean products imports before the momentum moves to crude oil, he said. But it will all depend on whether the crunch in China is “a short-term blip or to run for longer”.