For January and February 2022, Chinese coal production rose to 687 MMT. This is 11.2% up YOY from the 618 MMT in the first two months of 2021. This signals potential full year increase in production of 455 MMT compared to the country’s roughly 300 MMT of coal imports in recent years (peaking at 323mt in 2021). Hence, the current run-rate production more than covers the China’s coal import needs at an accelerating pace up from the 8% YOY increase in coal production seen in Q4 2021. Of note, industry sources suggest some of the incremental volumes could be used to bolster China’s coal stocks to avoid periods with elevated price levels, as seen in 2021.

For steel and pig iron production, the two first months of 2022 saw production of 158 MMT (down 9.7% YOY) and 132 MMT (down 8.7% YOY), respectively. Of note, both steel and pig iron production volumes were above their historical four-year averages. Due to production curbs ahead of the Winter Olympics, soft production figures were widely anticipated, and we would expect a continuation of recent covid-related lockdowns to impact near-term production and consumption figures – potentially prolonging the soft patch seen for the world’s largest dry bulk importer.

The Capesize market has benefitted from potential for backhaul cargoes of coal from Australia into the Atlantic before returning with iron ore cargoes into the Pacific. According to recent reports, the backhaul rates have been boosted by coal trade from Australia to Europe on the back of elevated energy prices. Of note, coal imports from Russia to OECD Europe equaled roughly 75 MMT in 2021, based on numbers from the EIA. Coal-fired power generation increased 11% YOY in Europe from 2020 to 2021 as higher gas prices and recovering demand worked against the relative shift to gas in power generation. Given the current situation, we would expect European coal imports to continue increasing as energy commodities remain in short supply.

A back of the envelope calculation using Europe’s total coal-fired power plant capacity of 162GW and power production derived from coal of roughly 458TWh during 2019, we estimate that Europe’s coal-fired power plants should have approximately 960TWh available to generate additional power. This translates into roughly 500 MMT of additional high-quality coal needed if Europe should fully utilize its coal-fired power plants. Hence, the potential for coal imports to Europe are meaningful when compared to 50-100 MMT annual imports of seaborne thermal coal to Europe between 2016-2021.

Russia’s ambassador to Singapore has criticized the city state’s decision to impose sanctions on Moscow in an interview with a Chinese state-backed newspaper. “We believe this decision to be a mistake, to be a wrong one, which runs counter to the development of bilateral ties, runs counter to strengthening regional cooperation,” Nikolay Kudashev told the South China Morning Post. Singapore is believed to be the only Association of Southeast Asian Nations (ASEAN) country so far to have announced sanctions against Russia.

While ASEAN has so far issued a joint statement calling for, “an immediate ceasefire or armistice and continuation of political dialogue that would lead to sustainable peace in the Ukraine”, it is not yet clear if any of the other ASEAN countries will go further and impose sanctions. Kudashev said the addition of Singapore to a list of countries that imposed sanctions on Russia meant that the political relationship between the two countries would be placed under “special monitoring”.

Just four days after Russia’s invasion of Ukraine, Singapore announced it would be imposing sanctions against Russia unilaterally and notwithstanding the absence of any binding UN Security Council decision or direction. Lawyers at Singapore-based law firm Kennedys described the announcement by Singapore’s minister for foreign affairs Vivian Balakrishnan as an “extremely rare move. It is believed that the last time Singapore had acted on its own in imposing sanctions against another country was over four decades ago, after the Vietnamese invasion of Cambodia in 1978,” the law firm said.

In early March Singapore imposed export controls on items that can be directly used as weapons to inflict harm on or to subjugate the Ukrainians, while it also imposed sanctions on four Russian banks. Those banks were VTB Bank Public Joint Stock Company, The Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, Promsvyazbank Public Joint Stock Company and Bank Rossiya. Singapore said that local financial institutions will be prohibited from entering transactions or establishing business relationships with those banks.

Kennedys said that as a major independent financial hub, Singapore’s sanctions on Russian banks and Russian related financial transactions could play a role in “limiting Russia’s ability to circumvent sanctions already being imposed by the US and the European Union”. The law firm also said that the imposition of export controls could have an impact on Russian trade in strategic goods as Singapore’s export controls also extends to sanctioned goods transshipped/transiting in Singapore and to the provision of financing of the export of such goods to Russia by Singapore financial institutions even where the goods do not originate from Singapore.

Even before Singapore had announced any sanctions the country’s largest banks were reported to have introduced restrictions on trade financing for Russian commodities. The move by DBS Group, Oversea-Chinese Banking Corp and United Overseas Bank came after the city state’s regulator, the Monetary Authority of Singapore (MAS), sent a circular to all financial institutions in Singapore, reminding them to manage any risks associated with the situation in Ukraine and the sanctions imposed by major jurisdictions.

We highlight initial thoughts on how the recent COVID-19 resurgence in China could impact the country’s Industrials & Transportation sectors. Setting the stage, China’s sudden infection surge seen over the past weekend across several Chinese cities has triggered mobility curbs in Shanghai and Jilin province, and city-wide lockdown restrictions in Shenzhen and Dongguan. While the situation remains highly fluid with close monitoring of key developments required, we summarize key impacts as follows:

1) Manufacturing activity: impact so far appears manageable despite partial factory closures and suspension of on-site business services in affected areas. That said, if the lockdown measures (adopted by Shenzhen and Dongguan) remain in place for longer than one week, we expect to see bigger disruptions.

2) Supply chain and logistics: Truck-based pick-up/delivery activity has been more impacted due to road/district closures and mobility curbs, while ports and airports in Shenzhen and Shanghai are operational as of now.

3) Passenger travel has been curtailed: Shanghai and Shenzhen saw 70%/80% of the scheduled flights being cancelled over the past two days due to sudden tightening of travel restrictions, while road- and rail-based travel has also seen large-scale cutbacks in services.

What is likely to happen?

• Mixed expectations for manufacturing activity. Though industrial companies under coverage generally expect limited impact from the suddenly imposed mobility curbs, China’s near-term COVID reaction is poised to pose further headwinds, adding to downward economic pressure amid disruptions in supply chain brought about by the ongoing Russia-Ukraine conflict.
• Positive on Infra: This year’s economic growth target of 5.5% announced at the NPC meeting now looks even more challenging against the latest macro backdrop. We therefore expect higher intensity in infra capex amid more accommodative monetary policy to mitigate the above-mentioned challenges. Worth noting early indicators including excavator and wheel loader sales saw improving sales trend in Jan-Feb’22, reflecting effects from front-loading of fiscal support. In addition, post China’s NPC meeting, NDRC mentioned its plan to front-load/accelerate key infra projects across railroads (including metros), ports, highways, and cold-chain logistics development. In addition, China Railway Corporation (‘CRC’, ex-MOR) also announced large-size tendering of freight-purpose locomotives totaling 229 units late last week, with railway capex typically used as a counter-cyclical tool.
• For shipping, drivers are becoming increasingly mixed: We retain our positive views on container shipping, given risk of port shutdown and major disruptions for on-the-ground logistics, which would send further shockwave effect to an already crippled global supply chain, though longer-term inflationary impact on end-demand is yet to be seen. For bulk shipping, demand outlook appears more positive, given our expectations for stronger infra response and liquidity support, in addition to rising need for securing food and energy supply amid tightening industry supply.

Container and Bulk Shipping — Latest infection resurgence breeds fresh uncertainty for global supply chain

• Temporary factory closures could impact manufacturing output and China containerized exports. China’s latest COVID-19 flare-up has prompted various companies located in Shenzhen and Shanghai to temporarily halt production, suspend on-site business services and step-up epidemic control measures. While it is premature to fully assess the exact impact of such factory closures, we expect prolonged closures to notably impact factory output and containerized export volumes.
• China ports back under the spotlight amid tightening of restrictions. While ports remain operational, the tightening of restrictions and precautionary measures (i.e., testing, inspection, quarantine, and disinfection) will certainly impact port productivity. Based on Maersk’s latest customer advisory, the overall landside transportation situation remains dynamic, with trucking service largely available provided truck drivers obtain negative Nucleic Acid Test (NAT) report as mandated by local governments. Considering the restrictions, Maersk anticipates overall trucking operational efficiency to be significantly reduced due to frequent NATs, especially in Pearl River Delta (PRD), Yangtze inland ports, Qingdao, and Tianjin. Moreover, warehouses located in Shenzhen will remain closed from March 14~20 while warehouses in Shanghai and Qingdao are operational for now though truck drivers will be requested to show health code for cargo delivery and require negative NAT reports not older than 48 hours, if they are arriving from medium- to high-risk areas. While it is premature to assess whether this latest episode will resemble that of closure of Shenzhen Yantian International Container Terminal (YICT) in Jun’21 and Ningbo-Meishan terminal during Aug ’21, China’s adherence to COVID-19 zero tolerance policy continues to expose risk of temporary port shutdown, which will create a major shockwave effect to an already crippled global supply chain.

War in Ukraine again brings into question our reliance on fossil fuels to power our economies. Especially oil and gas that fill the coffers of imperialistic regimes, ultimately funding tragedies such as the one in Ukraine. The supply of natural gas is an important issue in this debate. Europe depends on Russia for more than 40% of its gas. It has traditionally been used for heating our homes and producing electricity. But more recently, it is being sold as a solution to “clean up” shipping.

In the wake of Russia’s invasion of Ukraine, Europe is considering how to reduce its reliance on Russian gas. An increasingly loud — but not new — narrative is that we can switch to more LNG. As it is in liquid form, it is easier to transport by ships and therefore provides more flexibility than gas that passes through pipes. But ships carrying LNG as cargo to help Europe reduce dependence on Russian pipeline gas are one thing; ships starting to use LNG as a marine fuel are another. LNG lobbyists are eagerly pushing for the latter. This would be a mistake. For a sector that uses the world’s dirtiest fuels — residual fuel oil — LNG is being promoted as the fuel of the future.

While natural gas supplies about 20% of electricity and 37% of heat production in the European Union, it makes up only 6% of fuel used by ships. But that is about to change. The EU’s proposal for a low greenhouse gas (GHG) fuel standard is designed to increase the share of LNG in shipping. By 2030, EU shipping could be using about 9.3 million tonnes of LNG per year, which is larger than the total annual gas consumption of Romania. That leads us to a paradoxical situation in which the EU is pushing shipping towards gas while at the same time desperately trying to wean itself off Russian gas.

Natural gas is a fossil fuel. Although in some cases it can deliver marginal benefits, in most cases it does the opposite because of slippages and leaks of methane — a potent GHG. Faced with this argument, promoters of LNG point out the possibility of switching to biomethane — a gaseous biofuel largely derived from waste raw materials. But biomethane production is not scalable. There is only so much cow manure and municipal waste to go around. Analysis shows that biomethane would not be enough to meet the needs of the European households that already rely on natural gas for heating and cooking. In that case, why burn limited resources in shipping, which traditionally hasn’t relied on natural gas, while European electricity and heating systems are heavily dependent on Russian gas?

And that barely scratches the surface. Russia is not the biggest player in the LNG market, but it is slowly gaining market share. One of its main production facilities is on the Yamal Peninsula in the Russian Arctic, a project jointly developed by French energy giant TotalEnergies. Surprise, surprise. TotalEnergies is also one of the most prominent promoters of LNG in shipping and has signed agreements with French container giant CMA CGM to supply LNG and has launched LNG bunkering facilities in the ports of Marseilles and Rotterdam. Given the geopolitical context, switching to LNG in shipping is also feeding the war-waging resources of the Kremlin. Let us not forget, unlike some other majors, TotalEnergies decided not to pull out of the Russian oil and gas business. Some would argue that dependence on Russian LNG can be solved via diversification. But this argument misses the point. Once LNG is in the market, it gets sold and resold, making it difficult to trace the origin. Secondly, some of the world’s largest LNG importers have not joined Western sanctions on Russia. This means the volumes they were traditionally importing from other sources can be displaced with Russian gas, and we are back to square one and Russian gas will keep on flowing.

Europe is bound to replace some of the Russian gas with increased LNG imports for the next couple of months. If this is necessary to ensure that homes are heated and lights stay on, it should serve as a wake-up call for European politicians not to repeat the mistakes with gas elsewhere. Whether of Russian origin or from elsewhere, natural gas is a fossil fuel. Relying on it puts Europe at the mercy of despots.

Faig Abbasov is shipping director at clean transport campaign group Transport & Environment

US-listed shipping stocks are continuing to stay relatively buoyant amid a broader market sinking around them, but the performance was dampened by a sharp reversal in the tanker sector last week. The 29 names under coverage of investment bank Jefferies once again logged a weekly gain, though just barely at 0.5% on the week, with about equal numbers of winners and losers. This was still easily better than the 2.9% loss in the S&P 500 and 1.1% drop in the small-cap Russell 2000 index as investors continued to baulk at the impact of Russia’s war on Ukraine, inflationary pressure, and soaring energy costs. The Jefferies Shipping Index is up 21.5% year to date and 43.1% year over year.

The main damper for the group on the week was tanker stocks, as crude carrier rates fell backwards as quickly as they’d jumped up at the outset of the Ukraine crisis. Tanker owners dipped 10% as VLCC rates plunged 172% on the week, with suezmaxes and aframaxes down double digits. Meanwhile, product tanker rates are approaching two-year highs on record refining margins. The week’s biggest losers were major owners of crude tankers: Tsakos Energy Navigation at 19.5%, Frontline at 12.3%, Nordic American Tankers at 11%, DHT Holdings at 10% and Teekay Tankers at 8.3%. “TEN got caught up in the tanker rally, then gave up ground as rates fell,” said Jefferies’s lead shipping analyst Randy Giveans, while also noting that the Greek owner has yet to report quarterly earnings. “Frontline was a big winner with the tanker hype and rates surging, but as rates and sentiment fell, the stock did as well.”

Still, tanker owners’ losses were dry bulk owners’ gains, as that sector gained an average 6%, helped substantially by Black Sea disruption. “Average capesize spot rates surged 64% on the week as European traders source coal and other dry bulk commodities from further-away distances to replace lost Russian supplies,” Giveans said.

There were also increased shipments of iron ore from Brazil following the Lunar New Year break and weather disruptions, the analyst said.

Connecticut-based Eagle Bulk Shipping was a major beneficiary on the week with a 19% gain. While it does not own capesizes, its large fleet of supramaxes and ultramaxes has the greatest exposure to expanded grain and coal tonne miles for European deliveries, Giveans said.

Container ships also gained 6% on strong rates, helped by Israeli liner operator Zim, which jumped 10% after it reported an unexpectedly high dividend for 2021 and a strong 2022 guidance.

Since start March, confirmed Covid cases in mainland China has seen an increase of ~5%, mainly driven by the province of Jilin and Hong Kong’s neighboring Guangdong province – with increases of 488% and ~23%, respectively. In response, China has imposed lockdowns for both Shenzhen and Changchun, with the former stated to last “at least a week” and which marks the largest lockdown since Wuhan’s lockdown at the start of the pandemic. Supportive of its prevailing zero-Covid policy, China’s Centre for Disease Control and Prevention recently stated daily Covid-cases in Guangdong could rise to more than 75k if curbs were to be removed and travel allowed – stating that “…a suppression strategy should be maintained to ensure that the resulting Covid-19 pandemic can be maintained under control”.

With a back of the envelope calculation using the observed fatality rate of 21.5% for unvaccinated people above 80 years of age – a status applicable to 50% of China’s 36m elderly – would suggest potential fatalities of ~4m people from this demographic alone. This compares to global deaths current just above 6m and implicitly assumes the Sinovac vaccine would effectively protect the 50% vaccinated elderly, although researchers have questioned the efficacy of the vaccine variant against recent mutations.

The port region of Guangdong is widely described as a key manufacturing hub and home to Shenzhen Yantian port, one of China’s (and the world’s) busiest ports. Bloomberg states that the port remains operational, though with tighter Covid controls. In our view, a prevailing zero-Covid policy amid an outbreak could have widespread implication for Chinas production and port efficiency, potentially lowering exports and commodity import requirements, while adding to congestion issues and scheduling difficulties in the region. However, lower Asian export volumes from such a disruption could allow US ports to recover from the strain witnessed during the pandemic and further increase US port’s throughput efficiency, and thereby alleviate some of the lingering effects of the pandemic on the container shipping industry.

Whatever the extent of sanctions on Russian energy provision in the coming weeks, there is no doubt that there will be disruption to some key trading routes given that last year Russian coal was exported to 53 different countries!

Russia has also been ramping up shipments from several strategic ports in each geographic area. Thus exports from Ust-Luga in the Baltic have increased from 33 MMT in 2019 to 43 MMT in 2021, similarly in Vostochny, on its Pacific coast, from 30mt to nearly 34 MMT whilst the sharpest rise has been seen in the Black Sea from Taman where its high quality anthracite exports have risen from a mere 2 MMT in 2019 to 14 MMT last year.

It is yet to be seen how individual governments will view the extent to which Russian coal remains vital for their energy needs but it seems that for instance, collectively the EU may try to wean itself off the 50 MMT (38 MMT seaborne and 12 MMT overland) it currently imports from Russia; evidence of this sharp reduction in EU trade has already led Russian coal miner, SUEK, to declare force majeure on shipments from its Baltic and Arctic ports. As Russian imports represent 52% of the EU’s total coal consumption, finding ready alternative supply elsewhere may provide a challenge though it is noticeable that a Capesize was fixed from Queensland to Rotterdam this week, equivalent in tonne mile demand to approximately eight Panamax shipments from the Baltic!

China is the other major consumer of Russian coal importing 36.5 MMT last year, the majority in predominantly Supramax/Panamax tonnage from the Pacific ports though one Capesize a week was sailing from Taman in the Black Sea to China during 2021; whether international owners or indeed Chinese tonnage will wish to load in the Black Sea ports going forward given the current dangers and the sharp increases in P+I Cover is open to doubt, thus this might well be the first trade route to be adversely impacted.

South Korea and Japan import 17.2 MMT and 16.5 MMT coal respectively from Russian pacific ports and though prompt shipments continue to move there is a question mark about the extent to volumes they may wish to import in the medium term. Taiwan at 11 MMT is also a significant consumer of Russian coal as are Morocco (8 MMT) as well as India and Turkey (each 6 MMT). Should Brazil wish to switch supply, their 6 MMT could possibly be sourced from Colombia and USA whilst given the competition for Pacific coal, Vietnam (5.5 MMT) and Malaysia (4 MMT) may struggle to source elsewhere unless volumes do indeed ramp up from Indonesia later in the year.

Assessing the impact on the Dry Cargo market is difficult to accurately predict given the tightness in supply from alternative sources should sanctions on Russian coal come more broadly into force, but the overall disruption will in all probability increase tonne-mile demand should world seaborne trade continue at around its current 1.25 BMT. But finding alternate sources of supply to Russia might be a challenge. Indonesia, the world’s largest exporter (432 MMT in 2021) has already experienced export bans this year (to ensure domestic coal security) and is also suffering from limited barge transport and disruptive weather conditions. Australia is already close to export capacity at around 370 MMT as is South Africa (70 MMT) and Canada (33 MMT). The USA has the potential to export more than the 73 MMT it shipped in 2021, though any significant increase is limited by port export capacity. Similarly Colombia could also increase exports above last year’s 56 MMT (as recently as 2017 they shipped 103 MMT) but their Prodeco mine remains shut and other internal logistics issues persist. It is noticeable that stockpiles have been building up in China with domestic production (4 BMT annually) now running at record levels. Could China perhaps be tempted to release some its own coal given that the price for international coal continues to skyrocket- the price of Richard’s Bay coal for example touched $427/tonne last week against the $91 in mid-March last year! China presently only exports a meagre 4 MMT but twenty years ago Chinese coal exports were as high as 103 MMT!

We currently forecast global coal exports to increase by around 25 MMT(+1.9%) in 2022 but given the uncertainty of the Russian export position any forecast is subject to a number of ongoing provisos.

Indian exports of finished steel are seen rising 3 MMT in 2022 to 12 MMT, conflating with a two year high of Russian coal imports in the same year.

Market participants expect a reduction of Russian and Ukrainian steel exports on the back of the war in Ukraine, which is likely to give way for Indian steel mills to increase their global footprint. US trade sanctions on Russia could extend to the steel industry, where Russia is a significant supplier to the US, and opening for Indian sellers. Meanwhile, disruptions to Ukrainian steel production are anticipated, amplifying the supply gap.

The growth in steel exports largely depends on energy prices and the country’s steel capacity utilization. Over the next four years, Indian steel capacity is set to increase by 40 MMT per annum, almost doubling the quantum of capacity added during the past four years.

An increase in Russian coal imports to India is expected as more competitive prices are offered to Chinese and Indian buyers. Already, 1 MMT of Russian coking coal and thermal coal are designated for delivery to Indian ports in March, the highest since Jan 2020. Despite facing payment issues, India is exploring ways to set up rupee payment mechanism with Russia.

Cosco Shipping Holdings is the latest container ship owner to forecast a massive leap in full-year profit on the back of the red-hot liner markets. The Hong Kong-listed company said it expects to post a full-year profit of CNY 89.3bn ($14.1bn) for 2021 versus the CNY 9.9bn achieved 12 months ago, according to a regulatory filing. The strong result came despite the shipowner carrying only 2.15% extra containers last year which has been estimated at 26.9m-teu.

However, the average value of the China Containerized Freight Index (CCFI) was 2,615.54 points, representing an increase of 165.69% as compared to that for the same period of last year. “In 2021, under the influence of multiple factors including the Covid-19 pandemic, increasing demand and restricted supply, the global supply chain was confronting the challenges and impacts from congestion of ports, shortage of containers and delay of inland transportation, which resulted in a tensive supply-demand relationship,” Cosco Shipping Holdings said.

Looking ahead, the company said that so far in 2022, the major ports in Europe and the US have continued to be congested and the freight rates of trunk routes have remained stable. TradeWinds has previously reported that the company is among the major liner operators set to reward its employees with bumper payouts.

Caixin Global has reported that employees at the state-owned shipowner have received a payout worth up to 30 times their monthly salaries. Cosco paid out the cash to workers including sales and marketing staff, Caixin said, citing employees at the company.

Cosco Shipping Holdings is the world’s fourth largest containership operator behind Maersk, MSC and CMA CGM, according to data from Clarksons. The company currently deploys around 429 ships of 2.87m-teu of which 245 vessels of 2.1m-teu are owned, according to the shipbroker. The company also has a further 32 ships of 585,272-teu on order which is about 28% of its existing fleet by teu capacity.

Australia’s drive to send more coal to Europe during the Russia-Ukraine conflict has propelled the backhaul rate for capesize bulkers to highs not seen in months. The average spot rate for the C16 route covering voyages from Asia to Europe on Thursday shot up 141% to $12,450 per day, according to Baltic Exchange data. This figure hasn’t been this high since mid-December.

Overall, average capesize earnings jumped 14.5% on Thursday to reach nearly $21,700 per day, the Baltic Exchange said. The backhaul route only makes up 12.5% of the weight of the route basket. “It has to do with the backhaul, which is basically coal from Australia to Europe,” John Kartsonas, founder of dry-bulk ETF-trading platform Breakwave Advisors, told TradeWinds. “The distortion in coal trade is real, and capes are starting to get impacted by this.”

Among the day’s fixtures, the Baltic Exchange said BHP took a capesize vessel to move coal from Dalrymple Bay, Australia, to Rotterdam at a price of $28 per tonne. The Australian government is pushing the Queensland territory to boost coal volumes to Europe since neither Russia nor Ukraine is sending the commodity there during the war. Kartsonas added that the backhaul rate is the closest it has been to the benchmark China-Brazil route, which jumped 7.5% to $17,943 per day, in at least five years.

“Such a trend basically keeps more ships in the Pacific, causing a relative shortage of ships in the North Atlantic,” he said. “If it continues, as you know, we might see some fireworks down the road, but too early to call that.”

Europe will certainly need to source coal from more distant exporters such as Australia, South America, and South Africa as sanctions on Russian coal continue, said Stamatis Tsantanis, chief executive of capesize owner Seanergy Maritime Holdings. This may be welcome news for Brazil, which needs to double export volumes to meet its output target of 1.1m tonnes per day, he said. “Russia exports 50m tonnes of coal to Europe annually,” Tsantanis said.