Seasonality and low thermal coal inventory to support short-term shipping upside

Inventory levels for thermal coal at Chinese ports reflect the safety net that companies decide to hold, as well as the difference in expected and actual demand. When inventory rises above a specific amount, it is often negative for imports and shipping as firms seek to reduce inventory. Lower imports will lead to lower shipping rates, capesize and panamax sized ships in particular, which means lower revenues, earnings and free cash flows for dry bulk shipping firms.
Port inventory fell from the end of March
According to Shanghai Steelhome Information, total inventory for thermal coal at Chinese ports stood at 20.75 million tons on Friday, April 26th, a change of -4.97 million tons from March 29th. Total inventory fell most likely due to seasonality; demand for thermal coal often peaks during March and July/August as people no longer need to turn heaters or coolers on. Over the past two years, port inventories have peaked around the same month, or the month before, as firms temporarily scaled back on purchases and large volumes of coal were consumed during peak months.
Low inventory, weak imports
In the past two years, thermal coal imports have led inventory figures by about two months with a correlation of 0.74.1 This is likely because importers plan ahead to increase inventory and ensure adequate supply. Lower imports mean lower shipping rates as less ships are demanded. While lower shipping rates are negatives for share prices, the market has likely priced it in as it is history.
Stronger imports expected
Looking forward, China will likely increase thermal coal imports in preparation of the burning hot summer. As China’s thermal coal import makes up at least 5% of total dry bulk shipping revenue, an increase in thermal coal imports in the coming month(s) could be a short-term positive for dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Navios Maritime Partners LP (NMM). This will affect the Guggenheim Shipping ETF (SEA) as well, albeit to a lesser extent, because the ETF also holds investments in oil and container shipping that make up more than 50% of the shipping industry’s revenue.
1.    As an example, import volume shown on March 2012 is the actual value for January 2012.
Source: Market Realist