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Coaltrans China - How to capture the volatility of the international shipping market?

It is believed that the recent low freight rate has in some way contributed to rapid growth of China’s imported coal figures. Market participants at the 12th Coaltrans China Conference found that the major cost risks in the raw material supply chain lies in the maritime transport.

It is believed that the recent low freight rate has in some way contributed to rapid growth of China’s imported coal figures. Market participants at the 12th Coaltrans China Conference found that the major cost risks in the raw material supply chain lies in the maritime transport. How to minimize the risks during market volatility?

 

“The rapid development of import coal market has to some extent benefited from the depression of the shipping market. Low freight rates allowed coal traders to find spot ships to deliver their cargo. What about five years later when the freight rates return to normal?” Ji Wenyuan, Chairman of Shanghai Seamaster Shipbroking Company questioned during his speech at the Conference in Shanghai.

 

“It is important for coal traders to have knowledge of using FFA (Forward Freight Agreement) and TC rates to reduce the volatility of ocean freight, and understand the key routes in Baltic Dry Index and their statistical weight to charter rates each time,” Ji added.

 

In the case of coking coal shipment from eastern Australia to Zhoushan in December 2013, the TC rate of cape surged from US$14,000/day to US$40,000/day in a short time as capes in the Far East have seen a supply shortage. More time was required to fix a spot ship, hence lead-time had to be prolonged, which incurred extra storage costs.

 

At this moment the freight rate was US$20/ton. When the capesize market revived, there was congestion at the port. Suppose it took two to four days for ships to wait for berth, large demurrages made the cost of coking coal per ton rise another US$2. Finally, the cost DDP had grown US$11.

 

“Here, the trader was supposed to have the opportunity to lock the TC rate in December. What he should have done was to buy a few lot of “Cape1213” at US$14, 000 in mid-November,” Ji explained.

 

Therefore, if the ocean freight fluctuates, a number of extra costs will occur such as storage charges, uprising loading and discharging fees, demurrages, etc. In the downturn of the shipping market, they still occupy 13% to 20% of its price in CIF (Cost Insurance and Freight), according to Ji.

 

He said that a sensible choice of vessel size could help because the rate of one type of ship is closely connected to another – using a combination of different types. Larger vessels such as capesizes or VLOCs (Very Large Ore Carrier) are more economically efficient, followed by panamax, then supramax.

 

Additionally, ships can be fixed when freight is low and cargo being prepared subsequently, which could reduce the cost of cargo at the destination port.

 

COA (Contract of Affreightment) or SPOT could also be an option, depending on whether the trader is investing or speculating. COA is essentially based on the valuation of vessels which has little connection with the spot market. A COA of more than 10 years is suitable for large companies which have long term raw material procurement. However, it may not be ideal for small and medium size companies.

 

Ji said that coal traders are facing difficulties to seize the best timing for chartering ships. Currently, coal import is usually on FOB (Free on Board) terms delivered by spot ships on a small scale, which has cargo size ranging from 50,000 to 150,000 tons. Coal traders act as “middlemen” to sell the imported coal to local consumers. The requirements of costs and lead-time of end-user limited coal trader’s time for chartering ships.

 

“The current status is likely to continue in the next few years,” he added.

 

The shipping market is affected by capital flow and responds quickly to factors such as shipbuilding, international trading, paper market, weather conditions, ports issues and policies, etc. Once the seaborne sector is under control, the arrival price will be secured, which means that the cost of manufacturing is secured.

 

“Costs of raw material determine the competitiveness of their products. From the analyses of the supply chain, we saw that the major risks lies in the maritime transport,” said Ji, “Shipping, no matter with long term agreement or spot chartering, is one of the greatest competitive factors in the procurement of iron ore and coal. ”

 

In 2013, China’s imported coal amounted to more than 300 million tons. The government forecasted that the coal consumption will reach 4.2 billion tons in 2015, whereas the imported coal share will be 400 million tons.

 

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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