Colombian coal demand from Asia drives up Capesize shipping

Drewry Maritime Research projects a 3.3% YoY gain in Capesize shipping demand in 2024 due to the shift in Colombia’s coal exports to the Far East.

Freight rates on the Colombia-ARA route will be dampened as Europe, Colombia’s erstwhile major trade partner, is reducing its dependence on fossil fuel amid subdued electricity production and is emphasising the phase-out of coal.

In contrast, ample demand on the long-haul Atlantic-Asia route will aid earnings for Capesize vessels, which have been rerouting through the COGH creating additional shipping demand.

Surge in Colombia’s exports

Thermal coal exports from Colombia have been on an uptrend in 2024, registering a 12% surge YTD during January-August 2024.

Exports in August 2024 were at their highest level compared with those in the same month over previous years, with the annualised numbers indicating historically high export volumes this year.

Shift in trade patterns

The export surge is attributed to the re-direction of exports from Europe to Asia, leading to a shift in the composition of export partners and significant implications for the Atlantic and Pacific shipping markets.

Colombia’s coal exports to Europe doubled in 2022 and remained elevated in 2023 due to the energy crisis in the Continent resulting from the Russia-Ukraine war.

However, the YTD volume has contracted 53%, undermining the coal trade in the Atlantic market and reducing Europe’s share in Colombian exports to a mere 11% from 26% last year.

Meanwhile, the proportion of exports to the Far East (including China, South Korea, Japan and Taiwan) has inflated to 39%.

Dampening coal imports in the EU

Europe is the fifth largest thermal coal importer in the world and the most significant contributor to the Atlantic coal trade. Although its annual imports had been trending downwards from 2012 until 2021, the average (the annual average during 2012-21) remained above 100 million tonnes.

Due to the high dependency on Russia to meet its energy demand, the start of the Russia-Ukraine war threatened the region’s energy security and necessitated heightened coal imports in 2021 and 2022 despite the long-term commitment to curb emissions and reduce dependence on fossil fuels.

Despite the massive contraction in 2023, the annual volume remained higher than the historically low imports of 2020. However, we expect the historically low demand from the Continent in 2024 to continue over the long term, instead of being a transient decline.

Decline in coal usage; is this a temporary shift?

The Continent’s dampened demand at the end of 2023 and the start of 2024 was partly due to a less harsh winter. Despite the seasonal decline, the overall demand has been subdued due to lower power demand from industries in the region as industrial production suffered multiple hits after the spread of Covid in 2020. The construction and production activity stagnated further amid high inflation and borrowing costs during the Russia-Ukraine war.

The EU-27 volume index of production (2021=100), which tracks activities related to mining, manufacturing and electricity demand, was subdued in 2024, dropping to the lowest levels in the last four years. Electricity demand was thus muted, reducing approximately 6% in 1H24 compared to 2021 after it contracted in 2022-23 due to high energy prices.

In addition to the lower power demand, the heightened focus on renewable electricity, attributed to the rapid installation of new capacity in 2023, has further accentuated the decline in coal demand. In 2023, the electricity generated through renewables exceeded the volume generated through fossil fuels for the first time in history.

The Continent produced 74% of its electricity in January-June 2024 from non-fossil fuel sources, with the share of coal dropping to a mere 9%, the historically lowest share for the same period in any year. Meanwhile, the EU has added historically high solar and wind energy capacity to the grid in 2023, potentially reshaping the future energy mix.

Additionally, the domestic coal mined in the Continent has fallen to historically low volumes in 2023 for both anthracite and lignite, the major coal found in the region. Even though coal production had expanded temporarily in 2021-22 in response to the threat to energy security, the reversal in mining trends corroborates the shift in policy.

Impact on shipping demand

With the EU’s coal imports now subdued in 2024, coal freight rates on the Bolivar-ARA route have moderated despite skyrocketing period earnings in the Capesize market. The normalised freight rates on the benchmark Bolivar-ARA route have fallen below the normalised 1-year TC rates in 2024.

(Note: Drewry has compared two normalised series to analyse the differential impact on the Capesize vessels, considering spot rates of coal on the Colombia-ARA route and the 1-year TC rates for Capesize vessels.)

Meanwhile, the pivot in Colombia’s exports towards the Far East economies has multi-faceted opportunities. Firstly, the exports to the Far East have more than doubled YoY during January-August 2024, with the volume in 2024 so far even exceeding the annual imports last year.

While increased trade volume has supported the demand, the rerouting of vessels from the Suez Canal through the COGH in 2024 has additionally expanded the tonne miles on the Colombia-Far East route, primarily boosting the demand for Capesize vessels as approximately 75% of the volume is being shipped on Capesize vessels.

Given the high calorific value of Colombian coal and its discounted FOB prices, this redirection of exports to the Far East will persist. The annualised net addition to the Capesize demand is projected to be 3.3% of the tonne-mile demand in 2023, which is poised to support the period rates during the year.

Source: Drewry