Weight of Freight: Colombian coal switches from Europe to Asia-Pacific

Tonne-miles (tmi) for Capesize vessels leaving Colombia surged by 142pc over the first five months of 2024, data from analytics firm Kpler show, as Asia-Pacific replaced Europe as the main destination for thermal and metallurgical coal. This has resulted in much longer voyages and has been one of the key factors keeping Capesize freight rates elevated in 2024. 

 

Europe’s continued phase-out of coal has reshaped the dry freight market in the Atlantic basin, as it has pushed Colombian coal producers further afield in search of buyers. This trend has mainly affected Capesize (and the larger Newcastlemax) vessels, which now routinely travel to east Asia rather than their traditional destinations in north Europe. 

East Asia accounted for 54pc (7.47mn t) of Colombia’s total Capesize coal exports of 13.78mn t over the first five months of 2024, according to Kpler, compared with 24pc (2.2mn t of a total 9.34mn t) in the same period a year earlier. 

Europe’s significance, in the meantime, dwindled to just 8pc of the total for northwest Europe and 17pc of the total for the

Mediterranean, compared with 26pc and 40pc, respectively, a year earlier, according to Kpler.

On the route from Colombia to Asia-Pacific, companies prefer Capesizes to Panamaxes because of economies of scale on the longer route. In addition, Houthi attacks in the Red Sea have pushed all vessels sailing from Colombia to reroute around the Cape of Good Hope — increasing the journey time and keeping vessels off the spot market for longer. In January-May, Capesize and Newcastlemax tmi from Colombia to Asia-Pacific jumped by 360pc year on year to 85.3bn tmi, according to Kpler, indicating both higher volumes and longer journeys after the Red Sea disruptions started in October 2023.

The number of Capesizes and Newcastlemaxes sailing from Colombia to Asia-Pacific jumped to around 43 in January-May compared with 13 a year earlier, according to Kpler. 

The increase in these Capesize journeys has been a key factor behind higher Capesize rates, along with a surge in Capesize shipments of bauxite from Guinea to China, unusually firm Brazilian iron ore trade to China and congestion at Chinese ports. This resulted in the Tubarao-Qingdao rate — the bellwether for the Atlantic market — averaging 33pc higher year on year in the first six months of 2024. 

Voyages from Colombia typically hold a premium of $6-8/t over the rate on the Tubarao-Qingdao route, according to market participants.

Freight rates are also likely to stay elevated as west Africa is becoming increasingly key to the Atlantic basin Capesize market. The Atlantic market will see the first iron ore cargoes next year from Simandou in Guinea, which will further deplete the number of available Capesize vessels, while China’s demand for Brazilian iron ore is also set to remain firm. 

These factors combined with a low orderbook may start to price Colombian coal producers out of the market and will keep the Capesize freight market volatile in 2024 and throughout 2025. 

Transatlantic Panamax rates under pressure

The collapse in European demand for Colombian coal has affected the transatlantic Panamax market as well as the Capesize market. 

The number of Kamsarmaxes and Panamaxes that sailed from Colombia to Europe — including Turkey — during January-May fell to eight from 21 year on year, according to Kpler. But charterers are not then using these Panamaxes to carry coal to Asia-Pacific either (instead preferring to use the larger Capesize vessels) and the number sailing from Colombia to east Asia fell to eight from 11 a year earlier, according to Kpler.

Instead, the Panamax market will continue to rely on grain cargoes, largely from Latin America or the US Gulf coast, and it is unlikely that coal will become a key fronthaul trade unless Capesize rates rise high enough for charterers to consider using two Panamaxes rather than a single Capesize vessel. 

But even at its current elevated level, the Tubarao-Qingdao Capesize freight rate is much lower at $32.15/t than the Panamax rate of $44.20/t on the Santos, Brazil, to Qingdao route.

Asian market supports Colombian coal producers

The surge in Asian demand for South American coal has also helped keep Colombian mines operating in 2024, whereas previously there had been indications that some were considering either sharply reducing production or closing completely. 

As a result of the new demand, Glencore's Cerrejon mine production slipped only slightly during the first quarter of 2024 to 5.3mn t from 5.4mn t [a year earlier]. And Drummond’s overall production in January-May rose by more than 182,000t [to 12.53mnt]. Drummond and Glencore are responsible for about 90pc of Colombian coal output.

Asian utilities and steel mills need more high-quality and relatively low-sulphur thermal and coking coal. Colombia competes in these markets mainly with Russian and Australian producers. And as more Russian coal companies and terminals are being placed under sanctions — such as Suek, Sibantrachite, Mechel and Coalstar — demand for Colombian material could rise further.

Meanwhile, Indonesian lignite, relatively low-calorific value South African thermal coal and generally high-sulphuric US coal occupy other niches.

The increased volumes have been to a range of countries in east Asia. Exports from Colombia to China more than tripled year on year during January-May, rising to 4.9mn t from 1.4mn t; to South Korea they surged to 3.1mn t from 1.8mn t; and to India they increased to 770,000t from 470,000t, according to Kpler. 

Glencore earlier this year agreed to sell a large amount of coal for 2024 delivery from the Cerrejon mine to Chinese utility buyers and traders, according to market participants. The exact volume has yet to be revealed, but sources indicate that it may be up to 10 Capesizes/month, which may equate to 10mn-15mn t/yr of coal, or around half of [Cerrejon's annual exports]. ST Shipping’s activity on the Atlantic Capesize market has rocketed ever since.

Overall, coal in the past six months has transitioned from being an increasingly unimportant factor in the Capesize market to one of the key drivers of overall freight rates. Asian demand is now the sustaining factor for Colombian coal production and likely to remain so. But there is a key risk from rising Guinea bauxite and iron ore exports and firm Brazilian iron ore exports that could price Colombia out of the freight market unless the Capesize fleet expands in the coming years. 

Author:  Andrey Telegin, Senior Reporter

Date: 05/07/2024